Technology

RBC Says Memory Semiconductor Stocks Could Be the Big Q3 Earnings Winners

Lee Jackson

Published: September 27, 2019 7:25 am

Last Updated: January 30, 2020 3:22 pm

For years, the semiconductor stocks exploded higher, and investors were enjoying one of the best rides in the industry’s history. Driven by everything from bitcoin mining to video games, data center growth and so much more, some of the stocks surged in value.

Just over three years ago Nvidia Corp. (NASDAQ: NVDA) was a $20 stock. It made a gigantic move to almost $300 this time last year. Like all good things though, the huge run has come to an end, at least for now.

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There are some bright pockets for investors to consider, and a new RBC report focuses in on the top memory chip stocks as possible winners when third-quarter earnings are reported next month. The analysts said this in the report:

For the first time this year we think we’re entering an earnings quarter where expectations are for some companies to report upside. Over the past 12 months we’ve seen muted expectations and this appears to be shifting where we think neutral to up is more likely for a number of companies. Memory is the most likely candidate to see estimate revisions upward along with some data-center-exposed companies. Specifically, we think memory stocks are expected to see upside, while data-center-exposed names are expected to be “in-line” this compares to three quarters straight of muted expectations (for flat to down) heading into earnings.

Three stocks are rated Outperform at RBC, and all make sense for aggressive accounts looking to own the shares before third-quarter earnings come in. That said, one has just reported earnings (see below) and its guidance may have some impact on these estimates.

Cadence Design

This company has remained very resilient and the stock has surged since the lows put in last year. Cadence Design Systems Inc. (NASDAQ: CDNS) engages in the design and development of integrated circuits and electronic devices. Its products include electronic design automation, software, emulation hardware and intellectual property, commonly referred to as verification IP and design IP.

The company’s System Design Enablement strategy helps customers develop differentiated products — from chips to boards to systems — in mobile, consumer, cloud data center, automotive, aerospace, Internet of Things, industrial and other market segments.

Cadence Design recently released the ConnX B20 DSP, which provides a faster and more power-efficient solution for the automotive and 5G communications markets, including next-generation radar, lidar, vehicle-to-everything (V2X), user equipment (UE)/infrastructure and Internet of Things applications.

RBC has an $80 price target for the shares, while to the Wall Street consensus target is lower at $74.34. Shares closed Thursday’s trading at $66.58.

Micron Technology

This is a global leader in advanced semiconductor systems. Micron Technology Inc. (NASDAQ: MU) has broad portfolio of high-performance memory technologies, including DRAM, NAND and NOR flash, which are the basis for solid state drives, modules, multi-chip packages and other system solutions. The company’s memory chip solutions enable the world’s most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.

Flash memory is the storage technology used inside the lightest laptops, fastest data centers and nearly every cell phone, tablet and mobile device. With memory demand drivers remaining somewhat underappreciated, and with solid demand from end-markets such as data center, artificial intelligence, deep learning, big data, mobile and autonomous driving, Micron continues to execute well on its manufacturing road-map despite recent issues.

The company posted stellar numbers after the close on Thursday, beating estimates and offering mixed forward guidance. Micron traded down as much as almost 5% in post-market action. With the shares up 53% this year and end-of-quarter profit-taking probably part of the selling, this may give investors a solid buying opportunity.

RBC has a $55 price objective, and the consensus estimate is $60.10. Shares closed at $48.60 on Thursday.

Western Digital

This is a leader in the total addressable hard disk drive (HDD) market. Western Digital Corp. (NASDAQ: WDC) designs, manufactures and markets hard disk drives for use in enterprise storage, servers, desktop and laptop computers and consumer electronic devices. It also has a growing solid state drive and storage systems portfolio and is currently the third-largest enterprise solid state drive manufacturer.

The company is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.

Wall Street analysts feel the company’s business mix switch to NAND flash could continue to provide earnings momentum and growth as compared to the rather flat revenue streams from the HDD product line. In addition, personal computers account for 50% of hard disk drive sales and the improved performance at Dell and overall PC sales bodes well for the company in 2019 and beyond.

Shareholders receive a 3.28% dividend. The $68 RBC price target compares with the $53.65 consensus target and the most recent close at $61.80.

These stocks have solid upside to the RBC price targets and offer investors perhaps a more comfortable entry point. There is a good chance the market could start to trade sideways for the balance of 2019 as investors take profits, and these could be good vehicles for such a move, especially with solid earnings reports.