Old-timers remember back before the turn of the century when semiconductor stocks often traded in a deep cyclical nature. Back then, all eyes usually were on Intel and what new processor it was developing. That has all changed. With the automotive industry supplying huge demand, and high-function graphics chips for gaming consoles constantly being upgraded, the chip landscape is indeed a brave new world.
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One huge factor for next year could be the restocking of the supply chain, and a new Jefferies research report suggests the firm’s forecasts for the first half of 2021 could end up proving to be very conservative. Six specific reasons for the positive outlook were cited, after talking to four separate semiconductor supply chain contacts on three different continents:

1) Fourth quarter is coming in better than the third quarter.
2) Expectations are for first quarter revenues to exceed the posted in the fourth quarter.
3) Supply chain constraints are worsening, and many component lead times have been stretching materially.
4) Visibility for component vendors is stretching into the first half of 2021.
5) A number of supply chain execs want to increase inventory safety stock in the first half of next year.
6) Inventories have started to trend up and appear healthy.

Jefferies has five top stocks rated Buy for investors looking to add chip stocks to aggressive growth portfolios. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

AMD

This top stock appeared to have turned the corner in a big way but sold off after earnings. Advanced Micro Devices Inc. (NYSE: AMD) is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment makers. The company’s main product lines include desktop, notebook, server, graphics processors and embedded/semi-custom chips.

AMD announced last week that Amazon Web Services has expanded its AMD-based offerings with a new cloud instance for Amazon Elastic Compute Cloud.

In November, the company announced a multiyear joint development agreement with IBM to enhance and extend the security and artificial intelligence offerings of both companies. The agreement will expand this vision by building on open-source software, open standards and open system architectures to drive confidential computing in hybrid cloud environments and support a broad range of accelerators across high-performance computing and enterprise-critical capabilities, such as virtualization and encryption.

Jefferies has a $115 price target for the shares, while the Wall Street consensus target is $87.81. Advanced Micro Devices stock closed on Friday at $91.65 a share.

This stock could very well continue to benefit from the increase in information technology and 5G spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal-processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide.
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The company offers signal-processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Analog Devices has among the best end-market exposure, with high communications and aerospace/defense market exposure, in addition to offering investors a powerful 5G content growth story. Plus, acquisitions over the past few years like Linear Technology and Hittite Microwave should provide revenue and additional cost synergies that are still coming.

Investors receive a 1.76% dividend. The Jefferies price target is $160, and the consensus target is $153.69. Analog Devices stock closed at $141.15 on Friday.

Broadcom

The company reported solid earnings last week but actually traded off some. 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.

The company posted a modest earnings beat and raise as expected, as supply remains tight but the backlog is now at a record $14 billion, which is higher than in the first half of the past fiscal year. Demand visibility going out six months of non-cancellable orders shows 50% free cash flow margins. Toss in an 11% dividend boost, which is the highest in the chip arena, and everything seems to be clicking for Broadcom.

With the increase, the dividend yield now is 3.55%. The $420 Jefferies price target compares with a $417.43 consensus target. Broadcom stock closed most recently at $405.82.

This company is a huge Internet of Things benefactor and the stock has been very strong recently. Microchip Technology Inc. (NASDAQ: MCHP) is a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide.
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The company acquired Microsemi in June of 2018, and many on Wall Street believe that purchase and earlier acquisitions afford Microchip Technology ongoing mergers and acquisitions linked upside potential from cross-selling (to boost sales) and manufacturing synergies (to reduce costs).

Its sales, margins and earnings per share are somewhat more levered to the cyclical stabilization and recovery that is now upon us than many peers owing to its relatively more vertically integrated manufacturing network, significant channel inventory reduction over the past seven quarters, and elevated financial leverage.

Investors receive a 1.05% dividend. Jefferies has set a $145 price target. The consensus target is $137.05, and Microchip Technology stock closed at $140.61.

Nvidia

This sector leader made a huge purchase last year that is proving to be a solid tailwind. Nvidia Corp. (NASDAQ: NVDA) rarely has grown through acquisitions, but it bought Mellanox and paid a whopping $6.9 billion in cash in a deal that closed back in April. In what actually was somewhat of a duel, Nvidia knocked out Intel in its bid to buy the chipmaker, and the deal has helped Nvidia 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.

Nvidia recently outlined a $100 billion total addressable market for its data center business by 2024, or twice the $50 billion outlined at its last investor day. The upside includes $20 billion from core Mellanox networking, $10 billion from new class of data processing units and another $10 billion from the emerging edge AI EGX computing platform.

Top analysts continue to believe the company’s exposure to some of the most exciting areas of growth in tech (gaming/esports, autonomous driving, artificial intelligence and server acceleration) will drive well above industry growth over the next few years.

Jefferies has a $680 price objective. The consensus figure is $589.60, and Nvidia stock was last seen trading at $520.53.

We like to stay with recommendations for the large-cap market leaders as we see the potential for consolidation at some point soon for the sector, despite the positives going forward. While the path is well paved for these top companies, the big run-ups in the stock prices seem to indicate that scaling capital in and buying smaller opening positions may be the best idea after the huge “melt-up” rally off the March and September lows.

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