Merrill Lynch Has 3 RF Chip Stocks to Buy for 2016 With Up to 30% Upside Potential

By Lee Jackson Updated Jan 13, 3:59PM EST · Published Dec 17, 10:45AM EST

Follow 24/7 Wall St. on Google

This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.

Merrill Lynch Has 3 RF Chip Stocks to Buy for 2016 With Up to 30% Upside Potential — © Thinkstock

Face it, all you have to do is look around and you see people of all ages looking at their phones for data. Whether it’s directions or social media, the bottom line is the mobile boom is only going to continue. As we roll into 2016, while the Apple iPhone express may slow down some for chip vendors, the pace could pick right back up with an iPhone 7 introduction.

A new Merrill Lynch research report is very positive on the radio frequency (RF) chip vendors for 2016, which the analysts believe will remain the most compelling enablers of mobile broadband services for consumers. They think that current “chatter” over a weak iPhone 6s cycle, which has been a negative overhang, could be quickly replaced by the new product.

Three companies qualify in what the analysts term as the “beaten down” high-quality chip stocks that can grow RF chip sales at a secular annual rate of 10% and deliver 30%-45% EBIT margins. And they trade at about 11.5 times estimated 2016 earnings, which is a 30% discount to the sector.

Avago Technologies

This company made big headlines this year with a blockbuster buyout of chip giant Broadcom. Avago Technologies Ltd. (NASDAQ: AVGO) was originally a part of Hewlett-Packard and gets a huge chunk of its business from Apple and Samsung. It is a big provider in the cloud/hyperscale data center and networking sector.

In fact, the company recently announced it will demonstrate its latest optical transceiver technologies for next generation data center and enterprise storage applications. As data center networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.

The company produces RF front-end for LTE enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple, with between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up more than 10% quarter over quarter for the third quarter.
[recirclink id=304363]
The Merrill Lynch team like the leadership in the mobile, data center and broadband markets. They also see a cyclical rebound in industrial and communications demand. They do caution that the integration and financial risk of the Broadcom acquisition could weigh on the stock.

Merrill Lynch has a big $180 price target for the stock. The Thomson/First Call consensus price target is $172.04. Shares closed on Wednesday at $143.88.
Qorvo

This company that was formed after the merger of RF Micro Devices and Triquint Semiconductor. Qorvo Inc. (NASDAQ: QRVO) is a leading provider of core technologies and RF solutions for mobile, infrastructure and aerospace/defense applications. Qorvo has more than 7,000 global employees dedicated to delivering solutions for everything that connects the world.

The company has among the industry’s broadest portfolio of products and core technologies and was hit hard earlier this week as three companies reduced their estimates for iPhone sales. Merrill Lynch is convinced that the higher RF content in new smartphones should offset quarterly unit volatility. The firm also thinks strategic mergers and acquisitions could help diversify the company away from mobile dependence and add longer life business cycle products.

Merrill Lynch has a $65 price objective, but the consensus is set at higher at $70.11. The stock closed Wednesday at $53.23.

Skyworks Solutions

This stock has really rolled over from highs printed in the summer, and could it be ready for a big move higher. Skyworks Solutions Inc. (NASDAQ: SWKS) designs, develops, manufactures and markets proprietary semiconductor products, including intellectual property worldwide.

Its product portfolio includes amplifiers, attenuators, battery chargers, circulators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, VCOS/synthesizers and voltage regulators.

The Merrill Lynch team projects 10% sales growth for the company, which is two to three times the broader chip industry. They also cite the company’s record in the execution of chips, and a 13% EBIT growth trajectory from this year to 2017. Lastly, they love the early leadership in the huge $10 billion technology acceptance model in the growing Internet of Things world.

The Merrill Lynch price target is $100. The consensus is again higher, at $111.05. Shares closed most recently at $78.97.
[recirclink id=304351]
While the negative pall cast by lower iPhone sales estimates put a hit on these top stocks, the timing for aggressive accounts to add these to portfolios could be outstanding. With an iPhone 7 bounce in 2016, patient buyers could be in for big upside.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.