3 Chip Stocks With High Free Cash Flow to Buy Now

By Lee Jackson Updated Jan 13, 10:20AM EST · Published Apr 25, 10:50AM EDT

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.

3 Chip Stocks With High Free Cash Flow to Buy Now — © Thinkstock

One thing almost all tech investors are well aware of is that semiconductor companies with a high reliance on personal computer sales are struggling and probably should be avoided. Conversely, those with the biggest exposure to Internet of Things and industrial applications like automotive are doing far better. The big move to mobile is not slowing down, and the top chip stocks exploiting that and the other fast-growing areas are poised to do very well.

In an exhaustive new research report from Jefferies, outstanding chip analyst Mark Lipacis points out that chip stock performance is much more correlated to free cash flow (FCF) per share than earnings per share (EPS). With an 83% correlation FCF per share growth and three-year stock performance, that comes in much higher than the 61% correlation to EPS growth. That data is conclusive.

The analysts forecasts that three stocks rated Buy at Jefferies will post the highest FCF growth per share over the next two years.

Broadcom

This is 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.
[recirclink id=327816]
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 radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company 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 was guided up 10% or more quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.

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 1.3% dividend. The Jefferies price target for the stock is $180, and Thomson/First Call consensus price target is $179.04. Shares closed Friday at $150.33.

Microchip Technology

This company is a huge Internet of Things benefactor. Microchip Technology Inc. (NASDAQ: MCHP) is a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide. The company offers microcontrollers, such as 8-bit, 16-bit and 32-bit microcontrollers under the PIC brand name and 16-bit dsPIC digital signal controllers, as well as provides microcontrollers for automotive networking, computing, lighting, power supplies, wireless communication and wireless audio applications.

The company announced last fall that its MOST 50 Intelligent network Interface Controllers (INICs) are powering the infotainment systems of the new Toyota Alphard executive-lounge hybrid vehicles. This is the latest deployment among a wide variety of the Toyota’s brands, which have been using MOST50 in their infotainment systems for many years, including both volume and luxury vehicles. In the new Alphard implementation, Toyota is using MOST technology to ensure high-quality digital audio streaming throughout the vehicle.

Microchip investors are paid a very solid 2.9% dividend. The Jefferies price target for the stock is $53, and the consensus price objective is $53.32. The stock closed Friday at $49.71.

NXP Semiconductors

This company is considered a top play for investors looking for a chip stock with Internet of Things exposure. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry. It is also important to note that the combined company would be the number one supplier in auto semiconductors, number one supplier in global microcontrollers and a dominant supplier in mobile payments.

NXP is getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. Trading at solid discount to some of its peers, many analysts are very positive on the faster earnings growth potential relative to their competition. The company reports earnings after the close Monday.

The Jefferies price target is set at $112, and the consensus target is $104.25. The stock closed Friday at $84.39.
[nativounit]
These stocks have had solid runs off the February lows, so investors may want to buy partial positions in front of earnings. The long-term prospects for all are outstanding, especially with no major dependence on personal computers.

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.