Technology

Merrill Lynch Has 5 Semiconductor Stocks to Buy for the Next 5 Years

Lee Jackson

Published: May 17, 2017 8:35 am

Last Updated: January 12, 2020 11:56 am

If you thought the opportunities for semiconductors were big now, how about tossing another $100 billion in coming applications over the next five years. That’s right, between artificial intelligence (AI), the Internet of Things (IoT), 5G, virtual and augmented reality and autonomous cars, the $350 billion market for chips is expected to jump to $450 billion by 2022, and investors who own the right stocks may be in for a ride even more significant than the current one in the sector.

In a new Merrill Lynch research report, the outstanding semiconductor analyst Vivek Arya also makes the case that with cloud providers adopting new technology key semiconductor companies that provide critical sensing, processing and connectivity functions are increasingly in demand. He and his team focus on five companies to own for the next five years, all of which are rated Buy at Merrill Lynch.

Broadcom

This stock has been on fire over the last year and not only remains a top pick across Wall Street but is also on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its 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.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. Broadcom will report its most recent quarterly results at the end of this month.

Broadcom investors receive a 1.7% dividend. Merrill Lynch has a $260 price target on the stock. The Wall Street consensus target is $249.03. Shares closed Tuesday at $240.68.

Cavium

This stock has been a Wall Street favorite for some time and Merrill Lynch recently raised it to a Buy rating. Cavium Inc. (NASDAQ: CAVM) designs, develops and markets semiconductor processors for intelligent and secure networks in the United States and internationally. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. The company’s products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection and deep packet inspection.

The analyst feels the company’s multicore processor and security design acumen make it perhaps the only chip vendor that can challenge Broadcom and Intel by taking advantage of rapid and changing technology adoption by the cloud providers and the 5G mobile era, which is in the not-too-distant future.

In addition, numerous strategic acquisitions combined with the recovery of the company’s core organic product sales can help drive growth. Plus, the analyst notes the stock was essentially flat the past two years versus the huge run in the sector.

The $85 Merrill Lynch price target is a Wall Street high. The consensus target is $78.16, and shares closed on Tuesday at $75.48.

Microchip Technology

Microchip Technology Inc. (NASDAQ: MCHP) not only is a huge Internet of Things 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 is only owned by 7% of active portfolio managers, which is well below the 2011 peak of 12%.

Investors receive a 1.77% dividend. The Merrill Lynch price target is $95, and the consensus price objective is $91.63. The stock closed Tuesday at $81.63.

NVIDIA

This top chip company reported strong earnings all last year and also was the top performing stock in the S&P 500 in 2016. 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 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 (GPUs) in the cloud.

The company posted gigantic first-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI business. NVIDIA reported net income that more than doubled.

Investors receive a 0.55% dividend. The $138 Merrill Lynch price target compares with consensus target of $118.03. Shares closed Tuesday at $136.81.

Texas Instruments

This old-school chip tech company has come back into favor big-time. 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.

The company 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.

The company reported outstanding earnings for the first quarter and the analysts noted in a recent report:

First quarter beat, and second quarter guidance guide ahead of estimates with broad-based strength across end markets and geographies. Unlike Maxim who signaled some softness in autos, Texas Instruments signaled strength across auto/industrial segments and geographies. Solid balance sheet provides flexibility for mergers and acquisitions or ramping buybacks; we see 15%+ upside to EPS from any US corporate tax reform.

Texas Instrument investors are paid a 2.43% dividend. Merrill Lynch has set its price target at $95, while the consensus price objective is $85.35. The shares closed Tuesday at $82.27.

These five top stocks to buy for the next five years all have a big hand in the growing IoT sphere and so much more. Given the big runs in these stocks, investors may want to buy partial positions now and see if the rest of May doesn’t bring some selling.