Merrill Lynch Stays Bullish on Semiconductors Despite the Sell-Off

If any area of technology has been white-hot over the past year and more, it has been the semiconductors. Merrill Lynch remains very positive on the top stocks going forward in 2017, despite the recent sell-off that ripped some of the big momentum stocks. In fact, at the recent Merrill Lynch Global Tech Conference, where the firm hosted 16 of the top companies in the industry, the overall tone was extremely positive, as was sentiment, but without prior bubble exuberance.

A new research report from Vivek Arya, the firm’s outstanding semiconductor analyst, reviews the information gleaned at the conference and noted three very positive takeaways and trends:

1. Strong demand across autos, industrial, gaming, mobile and data centers.
2. Disciplined/low supply driving extended lead-times in certain cases.
3. Sentiment is positive, but not exuberant as investors are more willing to believe macro trends, but under-appreciate the secular/structural positives in the semiconductor sector.

Three companies were highlighted as among the most catalyst rich and having the most estimate upside. All are rated Buy at Merrill Lynch.

Broadcom

This stock has been on fire over the past 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.

Merrill Lynch sees this company as having the most potential catalysts going forward, and the firm cited the Toshiba resolution, the accretion from the acquisition of Brocade, a boost in the dividend and the 40% growth in iPhone content.

Broadcom investors receive a 1.6% dividend. The Merrill Lynch price target for the stock is $260. The Wall Street consensus target is $272.65. Shares closed last Friday at $254.53.

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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. While some say the valuation paid is high, the dividends down the road could be worth the price.

The analysts note that while the stock is a more controversial pick, benefits from the Purley server launch, which is expected in July, and the fact that Intel should be able to reaccelerate data center growth are positives investors need to focus on.

Intel investors receive a 3% dividend. Merrill Lynch has a $42 price objective, while the consensus target price is $39.90. The stock closed on Friday at $36.26.

NVIDIA

This top chip stock has reported very strong earnings, and it was the top performing stock in the S&P 500 last year. 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. They also feel the stock has the most potential upside.

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 $185 Merrill Lynch price target compares with the consensus price target of $125.59. Shares closed Friday at $164.89.

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These three top companies to buy 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 current selling doesn’t provide better entry points.