After plunging in the fourth quarter of last year, the semiconductor segment has rallied big-time in the first quarter. The PHLX Semiconductor Sector (SOX) index, which tracks that segment, is up 33% to an all-time high, compared with the 16% gain seen in the S&P 500. The swift reversal in outlook toward the industry and the overall economy caught many investors and Wall Street pundits by surprise, but with some positive tailwinds, and potential catalysts, there still could be solid upside.
With earnings reports for many of the top companies due right around the corner, some on Wall Street are treading very carefully, and the analysts at Deutsche Bank are as well. In a new research report, they preview first-quarter earnings and remain positive on some of the top companies in their coverage universe, though staying neutral on the sector as a whole.
The Deutsche Bank report noted this:
In light of ongoing cyclical pressures and following the recent run-up in the SOX, we remain neutral on the Semiconductor sector into first quarter earnings season (albeit incrementally more constructive as fundamental medicine continues to be taken). While investors appear very willing to look through the current first and second quarter headwinds and focus on the eventual cyclical recovery, we believe the timing of that recovery remains uncertain (second half of 2019 vs 2020) and much of that potential fundamental rebound to be reflected in both revenue and EPS estimates and, more importantly, share prices.
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Deutsche Bank has five top semiconductor picks, and all are rated Buy at the firm.
Broadcom
This stock has broken out to all-time highs. Broadcom Inc. (NASDAQ: AVGO | AVGO Price Prediction) 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.
Broadcom investors are paid a very solid 3.33% dividend. Deutsche Bank has a $330 price target on the shares. The Wall Street consensus target price is lower at $312.45, but the shares closed Wednesday’s trading at $330.53 apiece.
Inphi
This small-cap company is a strong contender in the data center arena. Inphi Corp. (NYSE: IPHI) provides high-speed analog and mixed-signal semiconductor solutions for the communications, data center and computing markets worldwide.
The company’s end-to-end data transport platform delivers high signal integrity at leading-edge data speeds, addressing performance and bandwidth bottlenecks in networks, from fiber to memory. Inphi has solutions to minimize latency in computing environments and enable the rollout of next-generation communications infrastructure.
The company announced last year that it is partnering with Innovium to provide customers multiple highly scalable industry-leading 100 G to 400 G data center solutions to meet the explosive bandwidth demand growth.
Deutsche Bank has a price target of $50, and the posted consensus target was last seen at $42.36. The stock closed at $46.92 a share on Wednesday.
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Intel
This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending. 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.
Intel investors are paid a solid 2.31% dividend. The $65 Deutsche Bank price target is well above the consensus price objective posted at $54.45. The shares closed trading most recently at $58.56.
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 of Marvell Technology receive a 1.25% dividend. Deutsche Bank has set its price target at $25. The posted consensus price objective is $23.41, and the stock closed on Wednesday at $24.87 per share.
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NXP Semiconductors
This is still considered a top play for investors looking for a chip stock with Internet of Things exposure. 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, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.
The Deutsche Bank price target for the stock is $110. The consensus target is much lower at $103.16, and the share price was last seen at $101.17.
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These are five top stocks in a sector that has been on fire. Given that share prices are elevated due to the big first-quarter run, and earnings reports are on deck, it may make sense to buy smaller positions now and wait for the results. Any large earnings miss or poor forward guidance could result in some serious selling.
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