[cnxvideo id=”655422″ placement=”ros”]The Internet of Things (IoT) is hardly new to most technology investors. But one thing is for sure, it may be the most explosive growth driver in the history of the semiconductor space. In fact, in a new research report, Merrill Lynch feels that technology is so big going forward that low-power IoT chips could be in almost 1 trillion devices over the next 20 years.
The Merrill Lynch team also notes in the report the keys to success for the IoT chips is the ability for processing, sensing, connectivity know-how, and most importantly, the ability to generate profits in a high volume, quick turnover marketplace. With the potential for chip sales to double to $34 billion by 2020, companies with direct exposure are sitting pretty.
The analysts point to five stocks rated Buy at Merrill Lynch as long-term beneficiaries of the massive IoT trends: two large cap old-school leaders and three other smaller players that more aggressive accounts may like.
Intel
This leader in semiconductors is working hard to scale away from dependence on personal computers, and the IoT is a big part of the shift. 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.
Earlier this year the company announced the purchase of Mobileye for $15.3 billion. The Israel sensor company gives the chip giant a leg up in the autonomous car competition, and it also adds many other capabilities. While some say the valuation paid is high, this is a big IoT segment going forward.
Intel investors are paid a solid 2.96% dividend. The Merrill Lynch price target for the stock is $42, while the Wall Street consensus target is $39.97. The stock closed Tuesday at $36.87 per share.
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Texas Instruments
This company that has come back into favor big-time, and it was also a top first-quarter pick. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.
In the most recent quarter, the company consensus estimates on both the top and bottom lines. Reported revenues for the first quarter of 2017 were up 13.1% year over year, due in part to greater demand in its automotive and industrial sectors.
Texas Instruments also increased its quarterly dividend earlier this year by 32% to $0.50 per share, or $2.00 annualized. The increase reflects its continued strength in free cash flow generation and its commitment to return excess cash to shareholders.
Investors in Texas Instrument are paid a solid 2.43% dividend. Merrill Lynch has a $92 price target for the stock, while the consensus price objective is lower at $82.11. The shares closed higher than that on Tuesday, at $82.36.
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Cypress Semiconductor
This stock is still trading below highs posted in 2015 and is a solid play for more aggressive accounts. Cypress Semiconductor Corp. (NASDAQ: CY) manufactures and sells embedded system solutions for the automotive, industrial, home automation and appliances, consumer electronics and medical markets.
Its product portfolio is comprised of programmable-systems-on-chip (PSoC), general purpose microcontrollers, analog integrated circuits, USB controllers, connectivity chips (Bluetooth, Wi-Fi, Zigbee) and memory chips.
The company has continued an expansion of its automotive portfolio, which will help enable manufacturers to bring high-tech automotive systems historically available only in luxury models to mainstream vehicles. Leveraging a wide range of differentiated products that includes microcontrollers, power management integrated circuits, memories and touch-sensing solutions, the portfolio enables value-added systems for Cypress’s top-tier automotive customers.
The Merrill Lynch team also see the company as leading the USB-C market, which provides a common interface for data, power, accessory and Ethernet. They see the mobile and PC industry to come on early and autos to follow.
Shareholders are paid a big 3.09% dividend. The 16 Merrill Lynch price target compares with the posted consensus target of $15.58. The stock closed most recently at $14.24.
Microchip Technology
Microchip Technology Inc. (NASDAQ: MCHP) not only is a huge IoT benefactor, but 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.
Microchip Technology investors are paid a very solid 2.85% dividend. The $85 Merrill Lynch price target is about the same as the $85.12 consensus price objective. The stock closed Tuesday at $76.73 per share.
Skyworks Solutions
This stock has been on a roll since last summer. 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.
Last year the company was reported to have made an offer to buy Microsemi, which provides a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets. The results of the potential deal remain to be seen.
Skyworks Solutions investors are currently paid a 1.13% dividend. The Merrill Lynch price objective recently was raised to $110 from $96, and the consensus target price is at $102.46. Shares closed trading most recently at $104.
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These five top companies all have a big hand in the growing IoT sphere. Given the big runs in their stocks, investors may want to buy partial positions now and see if May doesn’t bring some selling.
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