If you were long the semiconductors at the start of October, probably the last thing you want to do is buy into or even think about the industry now. However, the bottom line for aggressive accounts is these stocks have been hit so hard that multiples and valuations have been knocked to the lowest levels in some time, and the industry could provide a solid Santa Claus rally trade.
In a new research report, Jefferies makes the case that the “Tectonic Shift” for semiconductors is still in place and some of the more cyclical drivers may be less of a factor than in the past. The report noted this:
P/E multiples have compressed since 2016 and semis currently trade at a 30% discount to the S&P 500 – we think more cuts are baked into stocks than will be realized. We think there is a secular upward bias to semiconductor margins, driven by consolidation which is leading to: 1) better pricing power over customers, 2) pricing power over suppliers, 3) leverage on operating expenses, 4) improving mix away from consumer and handset and towards a more highly fragmented customer base in the industrial, auto and Internet of things markets.
The firm remains very positive on these five companies, all of which are rated Buy.
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Advanced Micro Devices
After years of frustrating performance, this top company appeared to have turned the corner, but it was absolutely destroyed in October and November. 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.
While third-quarter earnings were somewhat disappointing, new catalysts could drive the shares, with AMD having a generational share gain opportunity. EPYC 2/Rome can leverage the software and qualification work started with EPYC 1, and most expect Rome to ramp in the second half of 2019. The new Vega GPU will be industry’s first at nanometers, and AMD is already annualizing more than $100 million in data center GPU sales, addressing a $10 billion potential opportunity.
The Jefferies price target for the shares is $30, which compares with a much lower Wall Street consensus target of $24.17. The stock closed trading on Monday at $20.08 a share.
Broadcom
This stock has been crushed as well and is a top value play at Jefferies. 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 in 2019.
Broadcom investors are paid a 2.97% dividend. Jefferies has a $278 price target, but the posted consensus target is $288.74. The shares closed at $235.31 on Monday.
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Nvidia
This stock was absolutely massacred over the past two months. 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. It 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.
The stock is very sensitive to risk-off in high-growth stocks, but overstated noise from crypto mining, which has somewhat been offset by gaming strength, and spotty autonomous car testing also have added huge volatility to the shares.
Jefferies has set a stunning $320 price target. The posted consensus target is $233.09, and the shares closed on Monday at $153.05, up well over 5% on the day.
NXP Semiconductors
This company is still considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is another top value play at Jefferies. NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. The merger made NXP the fourth largest semiconductor company in the industry.
It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, number one supplier in global micro-controllers and a dominant supplier in mobile payments.
NXP continues getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. Trading at a solid discount to peers, analysts are very positive on the faster earnings growth potential relative to its competition.
The massive $128 Jefferies price target for the stock is much higher than the $102.22 consensus price objective. The stock closed on Monday at $81.94 per share.
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Texas Instruments
This old-school chip tech company offers solid value at current levels. 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 the company’s sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets. While the stock was hit hard recently as it is a big Apple supplier, the long-term outlook for this venerable leader makes it a safer bet for accounts with less risk tolerance.
Shareholders are paid a 3.20% dividend. The Jefferies team is comfortable with a $139 price target. The consensus target was last seen at $110.21, and the shares closed trading on Monday at $96.38.
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All five of these stocks were eviscerated in the October and November selling, but for aggressive accounts able to look past the rubble, there could be tremendous short-term and longer-term opportunities. Again, these are only suitable trades for those with a high risk tolerance.
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