Technology

RBC Stays With 3 Big Semiconductor Stocks Despite Recent Concerns

Lee Jackson

Published: May 2, 2018 8:00 am

Last Updated: January 12, 2020 12:11 am

If there is any industry for which red flags are starting to fly above most Wall Street firms, it’s semiconductors, and with good reason. Semiconductor stocks have produced blistering results over the past few years, and experienced investors are well aware of the cyclical nature of that industry. Without using the dreaded “It’s different this time,” it should be noted that demand in many new areas has skyrocketed and is expected to remain.

A new RBC research report notes that while numbers tend to move around on a monthly basis, recent data regarding semiconductor strength is encouraging. The report pointed to these recent statistics:

The Semiconductor Industry Association recently released its global semiconductor data for the month of March that witnessed +20% year over year growth (twenty-first consecutive month of year over year growth) to $40 billion, and we note growth accelerated from the Feb level (+18% year over year). The semiconductor industry continued to see notable strength in NAND (+34%) and DRAM (+60%) but growth was broad based as Analog grew 14% year over year, Logic grew 10% and Discrete grew 10% year over year.

With automotive, computing and wireless showing very positive gains, RBC remains very positive on three top companies, which are rated Outperform and make good sense for aggressive accounts looking to buy and hold.

Analog Devices

This stock could very well benefit from an increase in information technology (IT) spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits (ICs) 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.

Last year the company introduced a highly integrated polyphase analog front end 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 expect that corporate management ultimately will exceed its $150 million of targeted synergies. Analog Devices is expected to report upside to estimates owing to Linear Technology related cost savings, de-levering and realistic revenue synergies as it applies its superior commercial practices onto the Linear Technology business.

Analog Devices investors receive a 2.16% dividend. The RBC price target for the shares is $100 and the Wall Street consensus target is $103.14. The stock closed Tuesday at $88.86.

Qualcomm

This one may be offering aggressive accounts the best entry point in years. Qualcomm Inc. (NASDAQ: QCOM) designs, develops and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents.

In addition, Qualcomm provides systems software and components to wireless handset vendors and promotes applications and services that run on high-speed wireless networks. The company operates primarily through two segments: CDMA Technologies and Technology Licensing.

The company ended up finishing the fiscal second quarter with a positive earnings surprise, reporting earnings of $0.80 per share, compared to the $0.70 per share expected by analysts. The company generated $5.23 billion in revenue, compared to $5.19 billion expected by Wall Street.

The company has had a plethora of headline issues, not the least of which was a proposed buyout by Broadcom that the government put the kibosh on. That is in addition to ongoing issues with Apple that have kept a lid on the share price.

Shareholders receive a 4.88% dividend. RBC has a $70 price target, and the consensus target is $69.98. Shares closed Tuesday at $50.82.

Texas Instruments

This is old-school chip tech company has backed down from highs posted in January and is also offering a great entry point. 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 remains uniquely positioned to benefit from several secular drivers as the industry shifts toward the next phase of growth, the Internet of Things, and cyclical demand from industrial capital and expenditures pick up. The auto and industrial businesses grew by 18% to 21% in 2017, and the company is expected to expand gross margins by 10% as consolidation in semiconductors drives further pricing power.

Shareholders receive a 2.4% dividend. The $125 RBC price objective compares with a consensus price target of $119.16 and Tuesday’s close at $103.40.

These three outstanding plays in the semiconductor industry are also far less volatile than some other stocks of their peers. While hardly conservative, they do offer years of consistent earnings success.