Technology

Despite Volatility Surge, Stifel Likes 3 Semiconductor Stocks Into Q3 Earnings

Lee Jackson

Published: October 15, 2018 7:25 am

Last Updated: January 11, 2020 4:26 pm

For the past couple of years, owning the chip stocks has been an easy ride for aggressive growth investors. Exponential growth in all areas where semiconductors are used seemingly happened every quarter, and the sector outperformed in a big way. However, semiconductors are also highly cyclical, with many of the top companies nearing a five-year forward price-to-earnings full valuation.

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Like many of the top companies we cover at 24/7 Wall St. Stifel is extremely cautious in their sector coverage, but with that in mind, the analysts also see tremendous growth ahead for semiconductors in certain areas. They noted this in a recent research report:

We believe there are many names in our coverage universe that are benefiting from secular changes and trading at a discount due to broad cyclical and tariff concerns. Some of these secular changes include: Cloud data centers, Artificial Intelligence, slowing of Moore’s Law (price/transistor is increasing), Automobile Electrification/Autonomy, and Edge Computing. Coming into this earnings season we recommend names that have high exposure to these secular changes.

Three stocks are highlighted and have Buy ratings, and they may be good choices before third-quarter numbers are reported. It is important to remember these are only suitable for very aggressive accounts with high risk tolerance. Missing estimates or poor guidance could be very harmful.

Advanced Micro Devices

This top company turned the corner big time in 2018 and has been a hot commodity on Wall Street. Advanced Micro Devices Inc. (NYSE: AMD) 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.

Last year the company released its first major offering in five years, the Ryzen chipset, which many feel is 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.

The Stifel team said this about the company:

While we believe the Intel shortage may provide some opportunity for AMD to increase its personal computer market share in the fourth quarter of 2018, we expect AMD to maintain its long-term strategy and focus on delivering competitive processors for the high-end of the market rather than seeking short term opportunities for entry level devices. We remain focused on data center penetration and expanding gross margins as the catalysts for the AMD shares rather than increasing PC market share. In our view, the primary risk from the shortage is likely to impact other PC component suppliers.

The $38 Stifel price target for the shares is among the highest on Wall Street. The posted consensus target price is $25.67 a share. The shares closed Friday’s trading at $26.34 apiece.

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Mellanox Technologies

Shares of this small-cap company have been on fire in 2018. Mellanox Technologies Ltd. (NASDAQ: MLNX) is a fabless semiconductor company. It is an integrated supplier of interconnect products and solutions based on the InfiniBand and Ethernet standards.

Mellanox Technologies operates in the development, manufacturing, marketing and sales of interconnect products segment. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment and other embedded systems. It operates its business globally and offers products to customers at various levels of integration.

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Top Wall Street analysts are estimating 2018 earnings-per-share growth of an outstanding 41.8%. The Stifel analysts are also positive and said this in the research report:

Mellanox has recently announced multiple design wins and partnerships. We view the combined impact of these announcements as a positive indication of InfiniBand’s continued strength at the high end of the market. Specifically, Mellanox announced that the Texas Advanced Computing Center selected HDR 200G InfiniBand to accelerate its new supercomputer, named Frontera. We expect HDR InfiniBand systems to appear on the June 2019 Top 500 Supercomputer list.

Stifel has a $111 price target on the shares, which is slightly higher than the consensus target of $110.80. The stock ended trading on Friday at $71.72 a share.

Microchip Technology

This company is a huge Internet of Things benefactor and the stock has been battered recently. Microchip Technology Inc. (NASDAQ: MCHP) is 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 received a receipt of antitrust clearance in the United States for the acquisition of Microsemi and the deal closed in June. Most on Wall Street feel it is an outstanding addition. The Stifel analysts noted this in the report:

We believe the company may have some upside to our estimates driven by higher contribution from the Microsemi acquisition. In August, the company noted that Microsemi’s distributor inventory levels were ~4 months compared to Microchip’s typical levels of ~2.5 months. To resolve the issue, Microchip shipped ~$100mn less in June than Microsemi would have shipped previously, which resolved nearly half the required inventory correction. While the company believes it will take several quarters to fully resolve the issue, we believe management typically provides a conservative outlook on its acquisitions which has driven accretion targets higher in the past.

They also noted this in regard to the huge hit the stock has taken since reporting in August:

Microchip shares are down 31.0% since the company reported earnings on August 9 compared to the S&P 500, which is down 4.4% over the same period. In this time the valuation has decreased from 13.0 x consensus forward non-GAAP earnings per share to 10.1 x consensus forward non-GAAP EPS. This compares to the five year peak P/E of 20.1 x and five year trough P/E of 10.0 x for the shares.

Microchip Technology investors are paid a 2.09% dividend. The Stifel price target is $116. The consensus price objective is $109.80, and the stock closed most recently at $68.26.

These are three top semiconductor stocks to buy, some with huge upside potential to the Stifel price targets. It may make sense to scale-buy shares carefully in front of earnings reports, and perhaps even over a two or three month period, just in case more volatility comes into the sector.