Technology

Deutsche Bank Extremely Cautious on Semiconductors: 5 Top 2019 Picks

Lee Jackson

Published: January 18, 2019 7:10 am

Last Updated: January 31, 2020 1:50 am

For many tech investors, the ride on the semiconductor train from 2014 to the peak in March of 2018 was incredible. Massive nonstop gains driven by countless smartphone cycles, huge data center build-outs, industrial and auto use, and constant demand from the video gaming arena drove prices higher for years. While the PHLX Semiconductor Sector (SOX) index has backed up dramatically since last October, the group is still rich from a valuation standpoint.

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A new Deutsche Bank research report casts a very wary eye toward the industry, and while the analyst feels that the long-term secular view remains positive, the near term is another story. The report said this in an overview of semiconductors in front of upcoming fourth-quarter earnings:

Heading into the fourth quarter earnings season, we remain cautious on the semi sector. While the second half 2018 pullback in the SOX was a directionally encouraging step toward reflecting the current slowdown, we believe it was of insufficient magnitude on both an absolute (~-15% from recent peak) and relative (~-6%) basis to capture a full cyclical correction (~-25%/-15% in prior downturn).

The firm basically is saying that stocks are still overbought and multiples are still too high. However, it does remain positive on the companies that have exposure to data centers, autos and the potential 5G build-out and applications.

These five top stocks are rated Buy in the report, and all make sense for aggressive accounts looking to add chip stocks.

Intel

This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending, and it is the top mega-cap pick at Deutsche Bank. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Last year Intel announced the surprise resignation of the company’s chief executive, and recent media reports suggest the company could select new CEO soon, which could provide clarity and a positive stock catalyst. Typically the company picks the CEO from among insiders, but investors likely will welcome the outside perspective needed for tough portfolio decisions.

Intel investors receive a 2.48% dividend. The Deutsche Bank price target for the stock is $58, and the Wall Street consensus target is $54.58. The shares closed Thursday’s trading at $48.47.

Broadcom

This stock has been absolutely crushed and is the top large-cap pick at Deutsche Bank. Broadcom Inc. (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.

After being one of the best-performing stocks over the prior three years, Broadcom declined by 22% peak-to-trough in 2018, as its blocked bid for Qualcomm and recent acquisition of CA Technologies caused some uncertainty about the company’s strategic direction.

With all that noted, most Wall Street analysts like the CA acquisition and believe the software capability will give the company the opportunity to sell chips and software directly to Fortune 500 companies, and position them as more strategic suppliers.

Broadcom investors receive a 4.15% dividend. Deutsche Bank has a $300 price target, while the consensus target is $291.41. Shares closed at $255.33 on Thursday.

Marvell Technology

This is one of the favored mid-cap picks at Deutsche Bank for 2019. Marvell Technology Group Ltd. (NASDAQ: MRVL) is a fabless supplier of mixed-signal and analog semiconductor products to a number of storage, computing and communication applications, including hard disk drives, personal computers, servers, Ethernet switches, printers and connectivity markets.

Top analysts around Wall Street are very positive on the company’s purchase of Cavium, and many feel the deal adds significantly to the growth element for the stock. The addition also helps make Marvell solidly positioned in data center, cloud, enterprise, security and 5G, all the silos Deutsche Bank remains positive on.

Shareholders receive a 1.45% dividend. The $22 Deutsche Bank price target is less than the $23.83 consensus price objective. Shares closed on Thursday at $16.52.

NXP Semiconductors

This is still considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is another top mid-cap play at Deutsche Bank. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor made it 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 microcontrollers 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.

Investors receive a 1.26% dividend. Deutsche Bank has set its price target at $105. The consensus target is $100.25, and the stock closed most recently at $79.14.

Monolithic Power Systems

This off-the-radar play is the top small-cap pick at Deutsche Bank. 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.

The company offers direct current (DC) to DC converter integrated circuits 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.

It also provides lighting control integrated circuits 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 1.0% dividend. The Deutsche Bank price objective is $135. The consensus target price is $149.13, and shares were last seen at $122.60.

Given the overall caution Deutsche Bank has on the industry, it may make sense to buy partial positions here and see how investors respond to fourth-quarter results. In addition, numerous external factors are adding volatility to the market, so that should be factored in as well.