Merrill Lynch Says Don’t Chase AMD: 2 Top Chip Stocks to Buy Instead

By Lee Jackson Updated Jan 13, 10:18AM EST · Published Apr 26, 10:35AM EDT

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Merrill Lynch Says Don’t Chase AMD: 2 Top Chip Stocks to Buy Instead — © courtesy of Intel Corp.

Long-suffering Advanced Micro Devices Inc. (NASDAQ: AMD) got a dose of good news last week, and the stock jumped over 50%. While the new China licensing deal that prompted the spike in the stock is clearly a positive, the main reason for the move was probably a short squeeze, as short sellers have targeted the stock for years. Wall Street analysts who cover the stock remain very conflicted on the company.

As we noted Monday, Vivek Arya, who covers the stock at Merrill Lynch, is negative, and despite the licensing deal, he sees a staggering three more years of earnings-per-share losses on low profitability and the firm’s high debt burden. He is positive on two chip stocks now, and recommends investors buy them instead. Both are rated Buy at Merrill Lynch.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.

Intel announced a massive restructuring recently, which also included a large number of layoffs. The company is moving away from its slow-growth businesses and will be using the cash saved to expand its high-growth businesses of data center, Internet of Things and memory.

The company reported an inline first quarter and lowered the forward outlook. Merrill Lynch stays positive on the company and believes there is solid upside if the stock is granted a 15 times multiple. The analyst also thinks the restructuring can ultimately drive EBIT much higher.

Intel investors receive a 3.31% dividend. The Merrill Lynch price target for the stock is $36, and the Thomson/First Call consensus target is $35.53. Shares closed on Monday at $31.39.

NVIDIA

This top chip stock has reported outstanding earnings. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles. It is also moving into visual computing chips for cars, mobile devices and supercomputers. NVIDIA has a technology partnership with electric car maker Tesla.

The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

The company posted monster earnings for the most recent quarter, beating both sales and earnings estimates handily while also providing guidance that was better than expected. NVIDIA is expected to report this quarter the first week of May. Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and they see the stock benefiting from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud.

The Merrill Lynch team like the company’s long-term prospects in their core markets, which is offset to some degree by some legacy declines. They do note the ongoing litigation with Qualcomm and Samsung as a potential negative.

NVIDIA investors receive a 1.45% dividend. The Merrill Lynch price objective is $43, and the consensus target is much lower at $36.58. The stock closed Monday at $36.45.
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AMD has long been a “just around the corner” story, and the Merrill Lynch analysts just don’t buy it. These two stock are far better investments for aggressive growth investors looking to own chip companies.

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.