Technology

Merrill Lynch Out With 5 Top Chip Picks for the Rest of 2016

Lee Jackson

Published: September 16, 2016 9:55 am

Last Updated: January 13, 2020 3:29 am

It is no secret that the semiconductor arena is trading at a premium valuation, and in a deep market sell-off they could get hit extremely hard. With that in mind, historically the calendar fourth and first quarters are what one Wall Street firm refers to as the “Golden Period” for the segment, and with good reason. It typically outperforms the overall market by 2.5% during that period.

A new Merrill Lynch research report lists five top chip picks for the rest of 2016. The top companies have exposure to Apple Inc. (NASDAQ: AAPL), which is surging due to the popularity of the new iPhone 7, the huge growth in cloud computing and storage, and the gaming and auto sectors, where demand is also big.

All five stocks are of course rated Buy at Merrill Lynch and seem better suited for aggressive growth accounts.

Broadcom

This is the combined entity formerly known separately as Avago and Broadcom, and it is a member of the prestigious Merrill Lynch US 1 list. 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 radio frequency (RF) front-end for LTE-enabled Apple products, and Wall Street estimates that it does 15% of its total business with iPhone maker. It also has between 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or so quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.

Broadcom investors receive a 1.18% dividend. The Merrill Lynch price target for the stock is $215, and Wall Street consensus price target is $202.34. Shares closed Thursday at $172.72.

Inphi

This company 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. The company’s 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 to 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.

Merrill Lynch has a $44 price target for the stock, and the consensus target is $43. Shares closed Thursday at $40.07.

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 2.84% dividend. The $42 Merrill Lynch price target is well above the consensus target of $37.97 and the most recent close at $36.56.

NVIDIA

This is a top chip stock that has reported strong earnings this year, and posted through the roof second-quarter numbers earlier this month. 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: VR, PC gaming, chips in the automobile industry and graphic processing units in the cloud.

The $72 Merrill Lynch price objective compares with the consensus target of $64.72. The shares closed Thursday at $62.69.

Skyworks Solutions

This company 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.

The 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.

While the low demand for the iPhone 6s did trim earnings early on this year, 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, and the stock was up big Thursday on iPhone 7 expectations.

Investors are paid a 1.46% dividend. The Merrill Lynch price objective is $85. The consensus target is $83.17. Shares closed Thursday at $77.02, up well over 6%.

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