Technology

Top Analyst Says Semiconductors Have Peaked, Just 5 Safe to Buy Now

Lee Jackson

Published: December 4, 2017 10:15 am

Last Updated: January 12, 2020 5:47 am

It should come to no surprise to many that after almost two years of running higher, the semiconductor stocks are starting to run out of steam. Valuations are sky-high, and as we saw last week, when the rotation sellers come in hard and heavy, it can turn ugly real fast. While the segment is far less cyclical than it was 20 years ago, as applications have increased in many different products and silos, there will always be some degree of cyclicality.

In a new SunTrust research report, the semiconductor team not only downgrade some companies in the firm’s coverage universe, but they also feel that companies with slowing growth and higher financial leverage may be at risk. They believe that the industry as a whole peaked in the second quarter of 2017 and a top could be at hand. They noted this staggering statistic in the report:

Since the market lows on Feb. 11, 2016, the SOX index which tracks the semiconductor sector has delivered a total return of 138%, significantly exceeding the broader S&P 500’s return of 42%. Year-to-date, the SOX is up 47% versus the S&P’s 16% return. We believe most investors continue to see semis as stretched.

The analysts say to stick with the companies with solid growth and also to look for cyclical names with not only growth, but more modest valuations. SunTrust remains positive on these five companies, all are rated Buy.

Analog Devices

This stock spiked recently and has come back into a good buy range. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Earlier this year the company introduced a highly integrated polyphase analog front end (AFE) with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the Linear Technology acquisition, which closed earlier this year, is a huge positive. In addition, many on Wall Street feel that corporate management ultimately will exceed its $150 million of targeted synergies.

Investors receive a solid 2.11% dividend. The SunTrust price target is $112, and the Wall Street consensus target is $98.09. The stock traded early Monday at $83.95.

Broadcom

This company has been on fire over the last year and remains a top pick at SunTrust and across Wall Street. 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 has big exposure to the cloud through its Enterprise Storage segment (HDD controllers) and general data center build-outs in its Wired Infrastructure segment. Within HDDs, enterprise units are 15% to 20% of the business on a unit basis and 20% to 30% on a revenue/profit basis.

Broadcom investors receive a 1.5% dividend. SunTrust has a $325 price target, and the consensus target is $293.93. Shares traded at $271.35 Monday morning.

Monolithic Power Systems

This off-the-radar play could be offering continued upside potential. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments. It offers direct current (DC) to DC converter integrated circuits (ICs) that are used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.

The company also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.

Shareholders receive a 0.68% dividend. The $135 SunTrust price objective compares with the $124.38 consensus target price. The shares were trading at $117.00.

Microsemi

This could benefit from continued industrial demand and is another Top Pick at SunTrust. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets.

Products include high-performance and radiation-hardened analog mixed-signal integrated circuits, power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.

Microsemi employs a unique, mergers and acquisitions–focused business model in the rapidly growing semiconductor space. This business model allows it a valuable balance between growth and diversity. It gives Microsemi the ability to touch all parts of the semiconductor market, allowing for seasonal strength in some markets to offset seasonal weakness in others.

SunTrust has set its price target at $68. The consensus target is $63.64, and shares were last seen at $52.65.

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 third-quarter results that well exceeded Wall Street estimates, with much of the gains directly from the firm’s huge data center and AI business.

Investors receive a 0.28% dividend. The SunTrust price target is $253. The consensus target is much lower at $211.43. Shares were trading at $193.85.

The SunTrust concern is warranted as valuations are very high, and the stocks, as indicated by the numbers, have had huge runs. Investors looking to buy positions may want to scale capital in over a wide period and hope that the market backs up some.