Technology

Merrill Lynch Very Bullish on 3 Top Chip Stocks to Buy Now

Lee Jackson

Published: March 10, 2016 9:40 am

Last Updated: January 13, 2020 12:07 pm

We have discussed it before here on 24/7 Wall St., and it continues an incredible growth trend for investors. Radio frequency (RF) semiconductor sales have grown at an incredible 22% compounded annual growth rate of 22% in 2015. While weak iPhone 6s demand could drag that number down in the first half of this year, the start of the iPhone 7 cycle and the shift to higher content smartphones could move the number right back up.

A new research report from Merrill Lynch maintains that the increase in mobile data requires more cellular frequencies, which in turn means greater and increasingly complex arrangement for RF chips to switch, filter and amplify incoming and outgoing cellular and Wi-Fi signals. The bottom line for investors? The top RF chip makers have big upside potential. All three are rated Buy at Merrill Lynch.

Broadcom

This is the new name for the combined entity that was formerly known as Avago and Broadcom. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.

Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems, and displays.

The company produces RF front-end for LTE-enabled Apple products. Wall Street estimates that Broadcom does 15% of its total business with Apple. Additional estimates are that the company has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which has been guided higher. Customer diversity and content for Samsung could be more than enough to offset slower Apple business, should it occur.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.

Broadcom investors are paid a 1.4% dividend. The Merrill Lynch price target for the stock is $200, and the Thomson/First Call consensus target is $178.59. Shares closed most recently at $141.96.

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This is the 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. The Merrill Lynch analysts are convinced that the higher RF content in new smartphones should offset quarterly unit volatility. They also think strategic mergers and acquisitions could help diversify the company away from mobile dependence and add longer life business cycle products.

Merrill Lynch has an $85 price objective, but the consensus target is much lower at $54.29. The stock closed Wednesday at $48.18 per share.

Skyworks Solutions

This stock has really rolled over from highs printed in the summer last year, and it could 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 company posted very solid fourth quarter numbers, with sales up 15% and earnings up a stunning 27% year over year. While the low demand for the iPhone 6s did trim the first quarter outlook, the analysts are very positive on the stock as the iPhone 7 cycle begins. In fact, they expect the company to gain 10% to 15% higher content versus the last generation phone.

The $85 Merrill Lynch price target is lower than the consensus target of $90.74. Shares closed most recently at $71.02.

With most of the Apple slowdown long since priced into these top companies, investors with an eye toward the second half of 2016 could be in a sweet spot now, as the stocks still have big upside to the Merrill Lynch targets.