Technology

6 Momentum Semiconductor Stocks to Own for 2018 and Beyond

Lee Jackson

Published: October 23, 2017 8:35 am

Last Updated: January 12, 2020 6:56 am

Anytime a sector has a run like the semiconductors have done, the bears start to chirp about valuations. But the biggest obstacle to any bull run, whether it’s the market or a sector, is diminishing need. That usually precedes slowing sales and ultimately earnings. While the chip sector is hardly cheap, there are reasons to believe that the incredible demand will continue to grow, albeit maybe not quite as fast as the past five years.

In a new Merrill Lynch report, top flight analyst Vivek Arya remains very positive on the sector but feels that Wall Street may yawn at third-quarter earnings beats, as many are expecting them. He also thinks the vendors will tamp down enthusiasm to keep analysts and investors expectations in check.

Arya and his team cite six companies in their research universe that have the best earnings momentum. All are rated Buy at Merrill Lynch.

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.

The company posted gigantic second-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI businesses. The company reports in early November and many feel it can beat current estimates for the quarter.

Investors receive a 0.28% dividend. The Merrill Lynch price target for the stock is $210, and the Wall Street consensus price target is only $169.55. The shares closed Friday at $196.90.

AMD

After years of frustrating performance, Advanced Micro Devices Inc. (NYSE: AMD) appears to have turned the corner and is a hot commodity on Wall Street. It is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.

The analyst feels that AMD, which is releasing the first major offering in five years, the Ryzen chipset, is in his words “uniquely positioned” to compete with the big players like Intel and Nvidia in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.

Recently, CNBC reported that Tesla is working with the company to refine an artificial intelligence (AI) chip for autonomous driving tasks in its cars. Top analysts think the unconfirmed partnership would make sense, though most would not expect the shipment of AMD chips to Tesla to have a material impact near term. Clearly, this would constitute a critical win for AMD and support the thesis that the company is a primary beneficiary of the shift to parallel processing graphics processing units.

Merrill Lynch has an $18 price target, and the consensus target is $14.23. Shares closed Friday at $13.81.

Cypress Semiconductor

This stock traded in a tight range from March until last month, but it looks to be breaking out. 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.

Shareholders receive a 2.8% dividend. The $40 Merrill Lynch price objective compares with the consensus price target of $17.55. Shares closed Friday at $15.70.

ON Semiconductor

This is a smaller cap play that aggressive accounts may want to look at. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits (ICs) 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 ICs both through organic growth and acquisitions. It 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:

The analysts view ON 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, many continue to see structural upside for the shares.

Merrill Lynch has set its price target at $23, while the consensus target is $20.13. Shares closed Friday at $20.07.

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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 6% of active managers, which is well below the 2011 peak of 12%.

Investors receive a 1.56% dividend. The Merrill Lynch price target is $100. The consensus price objective is $98.67, and shares closed Friday at $92.73.

Texas Instruments

This old-school chip tech company is a top pick for the fourth quarter at Merrill Lynch. 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 50 cents per share, or $2.00 annualized. The increase reflects the company’s continued strength in free cash flow generation and its commitment to return excess cash to shareholders.

Shareholders are paid a 2.61% dividend. The $100 Merrill Lynch price objective is well above the consensus price target of $88.66. The stock closed Friday at $95.18.

It is important to remember that the market reaction to positive earnings reports may be muted, so the best idea may be to wait for the results, or buy small entry positions, and see if there is not some “selling of the news.”