After an incredibly wild and wooly year for investors, many across Wall Street are cautiously optimistic for 2021. Most equity strategists at the major banks and brokerage firms we cover see the country returning to a more normal state of affairs. The rollout of the COVID-19 vaccines and a reopening of the economy could very well jump-start growth. One sector that is a very solid idea for aggressive growth stock investors is the semiconductors.
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A new Goldman Sachs research report includes the firm’s semiconductor picks for 2021. The analysts noted this when discussing the firm’s very positive stance:
We remain bullish on the through-cycle growth and cash generation profiles of the Semiconductor and Semiconductor Capital Equipment industries, particularly given their status as the key enablers of secular trends including 5G, AI, ADAS/AV, and more. That said, given 1) broad-based supply chain shortages and extended lead times (which historically have invited excessive ordering on the part of customers and subsequent corrections), 2) IC units excluding memory as of October tracking ~6% above what we estimate to be the long-term trend-line, and 3) the SOX trading at an next twelve months P/E multiple relative to the SPX that is at its highest since Feb 2013, we believe there are reasons to be conservative, or at least, selective at the single-stock level heading into next year. As such, we recommend investors to lean into companies/stocks that have idiosyncratic earnings drivers that could offset any cyclical moderation (or augment cyclical strength).
Five stocks are top picks for 2021. While they all are rated Buy at Goldman Sachs, 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 company has turned the corner in a big way, and the stock is on the Goldman Sachs Americas Conviction List. 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.
The analyst said this:
Buy-rated AMD (also on the Conviction List) is our top pick in the group as we expect a continuation of strong double-digit revenue growth fueled by multiple product cycles and share gains, and margin expansion. With our calendar years 2021 and 2022 adjusted EPS estimates (ex SBC) of $2.47/$3.82 sitting 37%/65% above FactSet consensus, similar to the last few years, we see positive Street estimate revisions serving as the key catalyst for the stock.
Goldman Sachs has a solid $110 price target for the shares, while the Wall Street consensus target is just $91.31. Advanced Micro Devices stock closed on Monday at $93.23 a share.
24/7 Wall St.Analog Devices
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.
The analysts are very positive on the analog silo:
Following a disappointing 2020 (note ADI was only up 24% versus the SOX up 49% and the median stock in our coverage universe up 37%), we reiterate our Buy rating on ADI with our 12-month price target implying 17% potential upside. We see positive estimate revisions ahead based on the following drivers: 1) a cyclical recovery in Factory Automation (i.e. ~20% of Industrial segment revenue and ~10% of total revenue) – a business which grew on a year-over-year basis for the first time in 2 years in the fiscal year fourth quarter (October); 2) a re-acceleration in the 5G infrastructure business following what we expect will be two consecutive quarters of sequential revenue declines; and 3) an improving outlook in Automotive based on growing exposure to BMS and abating headwinds associated with passive safety.
Investors receive a 1.74% dividend. The Goldman Sachs price target is $169, above the $155.64 consensus target. Analog Devices stock closed at $142.59 on Monday.
Micron Technology
Micron Technology Inc. (NASDAQ: MU) is a global leader in advanced semiconductor systems. Its broad portfolio of high-performance memory technologies includes DRAM, NAND and NOR flash, which is 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.
With memory demand drivers remaining somewhat underappreciated, and with solid demand from end-markets such as data center, artificial intelligence, deep learning, so-called Big Data, mobile and autonomous driving, Micron continues to execute well on its manufacturing roadmap.
The analysts like the potential from current trading levels:
2020 was a tale of two halves for Micron Technology as the stock underperformed the SOX by over 10% in the first half on oversupply concerns and outperformed by 22 basis points in the second half as early signs of supply/demand improvement began to emerge. Looking ahead, we remain Buy rated on the stock with our thesis predicated on disciplined supply actions, particularly in DRAM, and improving demand in the cloud server and smartphone markets intact. In fact, we make positive revisions to our DRAM pricing assumptions in conjunction with this report.
The $83 Goldman Sachs price target was raised to $92. The consensus target is $78.15, and Micron Technology stock closed at $71.47.
ON Semiconductor
Aggressive investors may want to look at this a smaller cap play. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits (ICs) and discrete chips into 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 ICs through both organic growth and acquisitions.
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Many analysts view ON as an underappreciated way for investors to benefit from the emergence of advanced driver-assistance systems (ADAS) and eventually autonomous driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, many continue to see structural upside for the shares. The report said this:
We reiterate our Buy rating on the shares with 20% potential upside to our 12-month price target. In short, we see scope for positive earnings surprises in 2021 and identify the following three points as key drivers: 1) ON is well-positioned to benefit from the proliferation of ADAS and EVs – two segments of the automotive market where growth is secular, in our view; 2) there are multiple margin-enhancing initiatives – including the potential sales of fabs in Belgium and Japan, and the optimization of product portfolio – already in motion; and 3) there is now clarity on future leadership following the hiring of ex-Cypress Semiconductor CEO Hassane El-Khoury as the company’s new CEO.
Goldman Sachs has set a $38 price target, and the consensus target is $30.76. On Semiconductor stock ended Monday’s trading at $31.58.
24/7 Wall St.Qorvo
This company was formed from the merger of RF Micro Devices and Triquint Semiconductor back in 2015. Qorvo Inc. (NASDAQ: QRVO) is a leading provider of core technologies and RF solutions for mobile, infrastructure and aerospace/defense applications. Qorvo has more than 7,000 global employees dedicated to delivering solutions for everything that connects the world.
This company had a solid 2020, and the analysts are very positive on the prospects for 2021:
Qorvo exceeded investor expectations in 2020 as the company managed to grow revenue 18% (based on fourth quarter calendar company guidance) despite a double-digit percentage decline in global smartphone units and the geopolitical headwinds (note revenue exposure to Huawei declined from ~13% in 2019 to <5% in 2020, per our estimates). The stock, however, underperformed the SOX by almost 10% as the next 12 months P/E multiple contracted by 11% from 19.3x at the beginning of the year to 17.1x today versus a 27% increase for the broader SOX index.
The Goldman Sachs price target is $190. The consensus figure is $165.65. Qorvo stock was last seen trading at $161.11.
These top companies all have a long history of success and innovation. Most importantly, these stocks still offer a reasonable upside to the Goldman Sachs 2021 price targets. With the market very toppy, and year-end rebalances set to take place, it makes sense to perhaps buy partial positions and have some very tight stops in place.
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