Technology

Jefferies Loves Huge Growth Potential of 5 Buy-Rated Chip Stocks

Lee Jackson

Published: September 7, 2016 12:05 pm

Last Updated: January 13, 2020 3:51 am

If any sector has had a solid run over the past year it is the semiconductors. While some on Wall Street are starting to become a little concerned that the run is getting tired, three major secular growth drivers remain in play that can boost earnings even higher for longer. Demand in 100G, automotive and data centers is expected to drive revenues for companies with exposure to those arenas, and that demand could be big.

A new Jefferies research report makes the case that while the sector’s run is indeed a little long in the proverbial tooth, year-over-year revenue growth is expected to accelerate through the last half of 2016, and revenue growth is now above consumption, as opposed to inline, and sentiment for the sector is clearly neutral. The analysts favor five stocks with exposure to the three hot sub-sectors, and all are rated Buy at Jefferies.

Inphi

This is a strong contender in the data center arena. Inphi Corp. (NYSE: IPHI) provides high-speed analog and mixed signal semiconductor solutions for the communications, data center and computing markets worldwide. Its end-to-end data transport platform delivers high signal integrity at leading-edge data speeds, addressing performance and bandwidth bottlenecks in networks, from fiber to memory. Inphi has solutions that minimize latency in computing environments and enable the roll-out of next-generation communications infrastructure.

Many on Wall Street feel that the battle for dominance in outsourced cloud services between Amazon, Google, Microsoft and others should continue to drive growth in data center capital expenditures. The analysts feel that Cloud Data Center customers are more likely to embrace Inphi’s exciting 100G products like the PAM-4 solutions, ColorZ and others. The company has reported solid earnings and guidance has been mostly positive.

The Jefferies price target for the stock is $44, and the Wall Street consensus price target is $43.30. Shares traded on Tuesday near $41.40.

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 reported an inline second quarter, but data center sales came in way below expectations. But a new partnership with Microsoft for a virtual reality, as well as a consistent shift away for reliance on chips for personal computers, keeps the stock a compelling buy.

Intel investors receive a 2.85% dividend. Jefferies has a $44 price target, while the consensus target is $37.58. The shares traded on Wednesday near $36.45.

M/A-Com Technology

This company has been the subject of takeover chatter over the past year. M/A-Com Technology Holdings Corp. (NASDAQ: MTSI) supplies key enabling technologies for the Cloud Connected Apps Economy and Modern Networked Battlefield. Recognized for its broad catalog portfolio of technologies and products, MACOM provides high-performance analog RF, microwave, millimeter wave and photonic semiconductor products for diverse applications ranging from high-speed optical, satellite, wired and wireless networks to military and civil radar systems.

The company posted solid numbers that beat estimates and it raised forward guidance. Jefferies cites the continued strength and product ramp ups in the networking business and feels that the longer term upside comes from 100G data center optical. Some Wall Street analysts have pointed to the company’s higher debt leverage and lumpy aerospace and defense business as risk factors.

The Jefferies price target is $50. The consensus price objective is $47.45. The stock traded on Wednesday near $43.60.

NXP Semiconductors

This company is considered a top play for investors looking for a chip stock with Internet of Things exposure, and it has proven to be a very volatile stock this year. 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 has become the number one supplier in auto semiconductors, number one supplier in global microcontrollers, as well as 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. With shares trading at solid discount to some of its peers, many analysts are very positive on the faster earnings growth potential relative to the competition.

Many analysts feel that the company, which has a huge 15% organic earnings-per-share compound annual growth rate, is too cheap trading at 12 times consensus 2017 earnings estimates. Jefferies noted earlier this year that the paydown of debt from the sale of the Standard Products business is a big plus as well.

Jefferies has a massive $130 price target for the stock. The consensus target is $107.74. The stock traded Wednesday near $85.25.

NVIDIA

This top chip stock has reported strong earnings this year, and the ceiling for the company continues higher. 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.

NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has a technology partnership with electric car maker Tesla Motors. It 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.

Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Jefferies sees the stock continuing to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud.

The $73 Jefferies price objective compares with the consensus target of $64.72. The shares traded Wednesday near $62.20.

These five top semiconductor technology companies have very bright futures. Given the pricey market, investors may want to buy partial positions and see how the often volatile months of September and October play out.