Technology

Why Semiconductor Stocks Could Get Red Hot After Huge Nvidia Deal

Lee Jackson

Published: March 12, 2019 8:05 am

Last Updated: January 30, 2020 11:37 pm

It only takes one deal to get a sector to heat back up, and Nvidia Corp. (NASDAQ: NVDA), which is a company that rarely has grown through acquisitions, buying Mellanox Inc. (NASDAQ: MLNX) and paying $6.9 billion in cash is just the kind of deal to light the fire. In what actually was somewhat of a duel, Nvidia knocked out Intel Corp. (NYSE: INTC) in its bid to buy the chipmaker, and the deal will help the company boost its business of making data center chips that help power cloud computing.

Mellanox’s BlueField intelligent network adapters are another version of data center co-processing acceleration. Top Wall Street analysts see the combination of Nvidia and Mellanox as a definite threat to Intel’s data center CPU dominance of workloads. This indirect competition could ultimately be a problem for Intel shareholders.

While the entire sector got a boost from the deal on Monday, we screened our 24/7 Wall St. research database looking for other companies rated Buy with smaller market capitalizations that could draw attention from larger companies looking to add growth via acquisitions. We found four that could fit the bill.

AMD

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 last quarter’s 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 seven nanometers, and AMD is already annualizing $100 million or so in data center GPU sales, addressing a $10 billion potential opportunity.

Merrill Lynch has a Buy rating and a $27 price target. The Wall Street consensus target is $24.52, and shares closed Monday at $22.96, up over 4% on the day.

Marvell Technology

This is a favored mid-cap pick at Deutsche Bank, which has a Buy rating on the shares. 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.

Shareholders receive a 1.25% dividend. The $22 Deutsche Bank price target is less than the $23.83 consensus target. The stock ended Monday at $19.38, up almost 4%.

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 1.00% dividend. Deutsche Bank’s Buy rating comes with a $140 price objective. The consensus target is $148.50, and shares closed at $137.50, after rising over 3% on Monday.

ON Semiconductor

This is another smaller cap play that aggressive accounts may want to consider. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications. The company is in the midst of a transformation from a seller of commodity discrete chips into higher value-added analog integrated circuits, both through organic growth and acquisitions.

Top analysts view the stock as an underappreciated way for investors to benefit from the emergence of advanced driver-assistance systems and eventually autonomous driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, most continue to see structural upside for the shares.

Stifel has a $28 target price and a Buy rating. The consensus target is $24.57, and shares ended Monday at $22.61.

With market caps ranging from just under $6 billion to $22 billion, these four companies could add big-time growth to larger companies, and you can bet that industry giant Intel is continuing to search the sector looking for value after getting outbid by Nvidia.