Technology

Automotive Is Driving Huge Semiconductor Growth: 4 Stocks to Buy Now

Lee Jackson

Published: May 16, 2017 10:20 am

Last Updated: January 12, 2020 11:58 am

If there is one sector that continues to get dog-piled by bearish analysts and strategists, it is the semiconductors, and the concern is not without some merit. The PHLX Semiconductor Sector Index (SOX) is up 16% since the beginning of the year and a stunning 64% since May of 2016. Any way you cut it, that a huge move, and that’s the kind of parabolic lift that gets the bears revved up and the negativity flowing.

A new Deutsche Bank research report makes the case that the semiconductor vendors themselves are very positive about demand, pricing, cost and capacity, which are always the four major areas of concern in what is a highly cyclical arena. The analyst is especially bullish on what the auto sector adds to the chip stocks.

The Deutsche Bank report said this:

A promising area of semiconductor growth, the Automotive end-market(~10-15% of semiconductor industry revenues per SIA and Deutsche Bank estimates) has outgrown the semi industry by an average of roughly +7 percentage points since 2013, a trend that we see continuing directionally in 2017 with roughly +5 percentage points of outperformance.

Deutsche Bank favors five Buy-rated stocks now, and here we cover the four that are primarily traded in U.S. dollars.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers, and the Internet of Things (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, Intel 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. This is a big IoT segment going forward.

Autonomous driving could prove to be huge, and the analysts noted this in the report:

Intel expects the computing total addressable market (TAM) in Autos to significantly outpace vehicle unit TAM. By Intel’s estimates, autonomous cars will demand 10x increase in compute throughput, a 1,000x increase in pixels and 1,000x increase in storage between 2017 and 2030. In dollar terms, that translates to in-car TAM (systems, data and services) of $70 billion and another $40 billion of TAM for autonomous driving-related data center spending.

Intel investors are paid a solid 3.07% dividend. The Deutsche Bank price target for the stock is $43, and the Wall Street consensus price objective is $39.90. The stock closed Monday at $35.63 per share.

Maxim Integrated Products

This company supplies chips to Samsung for the Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal integrated circuits worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.

The Deutsche Bank reported noted:

Regardless of which processor wins supremacy in Automotive, Maxim stands poised to benefit with its Power Management and SERDES content as autonomous cars require leading power efficiency and data distribution. Moreover, the company should see a linear benefit with additional content needed for greater levels of autonomous-driving features in future generations of automobiles.

Shareholders are paid a 2.82% dividend. Deutsche Bank has a $50 price objective for the shares, and the posted consensus target price is $47.74. The shares closed on Monday at $46.82 apiece.

NXP Semiconductors

This is considered a top play for investors looking for a chip stock with automotive and IoT exposure, and it is often rumored as a takeover target. 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 IoT, mobile-phone charging, increased cellular data consumption and LED lighting. Deutsche Bank noted this in its report:

NXP highlighted its #1 position as the global automotive semi supplier, with leading positions in areas such as auto analog/RF/DSP, auto MCUs (ex Japan) and merchant auto MEMS sensors. Twelve of the company’s top 20 customers are automotive, with the end market representing ~41% of total revenues (ex Standard Products) in 2016.

The $110 Deutsche Bank price target compares with the consensus price objective of $108.65. The shares closed most recently at $107.04.

ON Semiconductor

This is a smaller cap play that aggressive accounts may want to examine. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications. The company is in the midst of a transformation from a seller of commodity discrete chips into higher value added analog integrated circuits both through organic growth and acquisitions.

The company is a leading sensor company, and the analysts noted this in the report, while also citing a delivered balance sheet and positive cash flow as big positives going forward:

We continue to view ON’s leadership position in Automotive Image Sensors as an underappreciated way for investors to benefit from the emergence of ADAS and eventually Autonomous Driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, we continue to see structural upside for the shares.

The Deutsche Bank price target is $20. The consensus target is $18.02, and shares closed Monday at $15.32.

These are four top semiconductor stocks in a subsector that has gigantic growth potential on its own, and when you add in the additional IoT possibilities and other industrial applications, there is tremendous upside potential. These stocks have all run, so it may make sense to buy partial positions now and see if we don’t sell-off some in the summer.