While on the surface it would seem that the semiconductor stocks have all been moving in a parabolic swing higher forever, the reality is that over the past three years the compounded annual growth rate for the sector has limped along at a very sluggish 2%. The analysts at BofA Securities point to simmering and ongoing trade tensions, the global pandemic and a maturing 4G smartphone cycle as the main reasons for the slow growth.
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The good news for investors is the BofA team is very positive in 2021. They see growth jumping to a massive 8% compounded annual growth rate from calendar year 2020 to 2022, and in a new research report they detail these reasons for the firm’s very bullish forecast:

1) Global gross domestic product jumping to 5.4% in 2021. The highest since 1973.
2) Very lean investors across the sector.
3) Enhanced investments in 5G as phone units grow two times year over year.
4) Semiconductor manufacturing reshoring.
5) Secular tailwinds from AI, gaming, IoT and digitization of the global economy

While the ongoing impact from the COVID-19 pandemic is still a wildcard, and rising interest rates could have an impact on trading multiples, the analysts feel that investors will look to the semiconductor space as a way to boost what they call “high-quality alpha generation.”

BofA Securities combines both semiconductor and semiconductor capital equipment in the research report. We are focused on the five top picks from the semiconductors. While all are rated Buy, 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 a favorite on Wall Street. 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.

BofA Securities has a solid $110 price target for the shares, which compares with a lower Wall Street consensus target of $92.06. Advanced Micro Devices stock closed trading on Wednesday at $91.78 a share, down almost 4% on the day.

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.

Analog Devices stock investors receive a 1.75% dividend. BofA Securities raised its price target to $178 from $160. The consensus price target is $159.21, and shares closed Wednesday at $158.48.

Broadcom

The company reported solid earnings earlier this month and is also the newest member of the US 1 list. 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 now sits at a solid 3.19%. BofA Securities has a $530 price objective, while the consensus target is $467.21. Broadcom stock closed on Wednesday at $451.21.

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.

Many on Wall Street believe Microsemi and earlier acquisitions afford the company ongoing mergers and acquisitions linked upside potential from cross-selling (to boost sales) and manufacturing synergies (to reduce costs).

Investors receive a 1.19% dividend. The $146 BofA Securities price target was lifted to $170. The consensus target is $146.10. Microchip Technology stock closed Wednesday at $150.70.

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.

BofA Securities has set a $625 price objective. The consensus figure is $591.66, and Nvidia stock was last seen Wednesday at $541.27.

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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 industry, 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 of the March and September lows and continued buying into the new year.

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