Citigroup has ranked these two chip stocks as new top favorites.

Investing.com - Citigroup has recently named Texas Instruments (NASDAQ:TXN) and Power Integrations (NASDAQ:MPWR) as their top picks in the analog semiconductor sector after the latest earnings season, stating that this sector has entered a more favorable phase of the cycle.

Analyst Atif Malik stated in a Monday research report, “We believe this sector is in the second phase of our cycle framework, during which stocks with product cycles or self-improvement stories tend to outperform the sector.”

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Regarding Texas Instruments, Malik emphasized the upside potential for gross margins, as capital expenditures remain moderate and the company is increasing investment in R&D related to data centers.

Meanwhile, Power Integrations is favored because he expects the company “to achieve above-industry growth driven by increased sales of enterprise data products.”

Citigroup also maintains a bullish outlook on the entire sector. Malik pointed out that by 2025, sales related to data centers for analog companies are expected to surge 50-70% year-over-year, far exceeding the approximately 6% combined growth rate of the analog and MCU industries. He believes that as data center revenue as a percentage of sales increases, exposure to this end market could support valuation multiples.

The analyst wrote, “Although data center exposure currently accounts for only a dozen or so percent of most analog companies’ sales, we believe that as data center end-market revenue accelerates to over 25% of sales, the sector could sustain a valuation re-rating.”

Looking ahead, he estimates that data center and AI revenues for analog companies could grow approximately 70% year-over-year in 2026.

From a cyclical perspective, Citigroup’s analysis indicates that the upcycle for analog chips still has room to grow. Industry revenue in the current cycle is only slightly above the previous peak and remains below the average expansion level seen in past cycles.

Therefore, Malik believes that revenue and shipments for analog and microcontroller products “could grow about 30% from current levels, and the upcycle could last at least another year.”

In terms of end markets, the analyst sees improving industrial demand trends, with global manufacturing PMI stabilizing, while the automotive sector is expected to remain weak, especially as China’s vehicle production is forecasted to decline in 2026.

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