Tuesday’s rally of the tech-heavy Nasdaq was huge, after it had slipped for the second time in the past week into correction territory, which is described as a decline of 10% or more. Surprisingly, one technology subsector has declined even more and may be offering aggressive investors a huge opportunity to buy some of the top companies.
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A new BofA Securities research report focuses on semiconductors, which have been in the news recently as chip shortages have caused some issues in numerous industries, most notably in the automobile arena. The analysts point out that the Philadelphia Semiconductor Index (SOX) had fallen 15% from highs, which is very close to the average 20% sell-offs that have been produced annually since 2010.
With demand increasing, and the stocks at some of the best entry points in the past six months, six top companies are rated Buy in three specific chip categories, and all offer intriguing value for aggressive growth investors. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Automobiles/Electric Vehicles
NXP Semiconductors N.V. (NASDAQ: NXPI) is still considered a top play for investors looking for a chip stock with Internet of Things exposure. It became the fourth largest semiconductor company in the industry after it merged with Freescale in late 2015. It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the 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 even LED lighting. With shares trading at a solid discount to peers, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.
Many on Wall Street believe NXP has revenue drivers that are not broad-based and macro-driven, but rather company-specific product cycles developed by an engaged management team, as well as margin expansion drivers that are undervalued by investors. With improving trends in various end-markets, it is a top stock to own now.
Investors receive a 1.30% dividend. The BofA Securities price target for the shares is $220, and the Wall Street consensus target is $210. ’NXP Semiconductors stock rose over 7% on Tuesday to close at $183.82 a share.
ON Semiconductor Corp. (NASDAQ: ON) stock also should benefit from the increased demand from auto and EV companies. It is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits 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.
BofA Securities turned around on the company recently and noted this:
Double upgrade from Underperform to Buy on confidence in long-term margin expansion; raising our price objective. Multiple levers (adjustments to mix, ramp of 300mm, fab sales) should drive gross margins to 43% and free-cash-flow margins to high-teens.
It raised its price target to $48 from $32 with that upgrade. The $45 consensus target for On Semiconductor stock is still well above the most recent close at $37.93, even after a gain of over 5% on Tuesday.
Cloud
Shares of Advanced Micro Devices Inc. (NYSE: AMD) been on fire and there are many reasons to buy them at the current, reasonable entry level. This global semiconductor company’s products include x86 microprocessors as an accelerated processing unit, chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs, and development services. They also include server and embedded processors, and semi-custom System-on-Chip (SoC) products, development services and technology for game consoles.
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AMD provides x86 microprocessors for personal computers under the AMD Ryzen, AMD Ryzen PRO, Ryzen, Threadripper, AMD A-Series, AMD FX, AMD Athlon, AMD Athlon PRO and AMD Pro A-Series processors brands. It provides microprocessors for notebook and 2-in-1s under the AMD Ryzen, AMD A-Series, AMD Athlon, AMD Ryzen PRO, AMD Athlon PRO and AMD Pro A-Series processors brands, as well as microprocessors for servers under the AMD EPYC and AMD Opteron brands. Its chipsets are sold under the AMD trademark.
The analysts are very bullish on an upcoming product launch:
Buy ahead of Milan server CPU launch on March 15th, product/partnership announcements could help re-energize stock. The EPYC-1 launched in June 2017 and since unit share is up to 8% from 0.4% and average selling price to $700+ from $200-$300 prior; Milan can drive higher. Dependable roadmap enables share gains and AMD is already looking towards Zen 4 (5nanometer Genoa in 2022) and Zen 5 in concept design.
The $115 BofA Securities price target on Advanced Micro Devices stock compares with lower $105 the consensus and the most recent close at $78.53 after a 6% increase on Tuesday.
Sector leader Nvidia Corp. (NASDAQ: NVDA) made a huge purchase last year that is proving to be a solid tailwind for the company. While it rarely has grown through acquisitions, Nvidia bought Mellanox and paid a whopping $6.9 billion in cash. The deal closed back in April of 2020.
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 massive $675 price objective. The consensus figure is $596.59, and Nvidia stock ended Tuesday at $500.81 a share. That was up over 8% on the day.
5G
Broadcom Inc. (NASDAQ: AVGO) has reported solid earnings and is also a member of the US 1 list. It has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
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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 continues to fire on all cylinders, and the analysts noted this when the company posted results:
Modest beat/raise, we reiterate Buy and raise our price target on a top pick in computing/wireless RF. We like the 90% booked with a $16-17 billion backlog providing solid visibility; Apple content gains; best free cash (50% mgn) & dividend yield.
With the increase, the dividend yield now is a solid 3.42%. BofA Securities has a huge $550 price objective. The posted consensus price target is lower at $467.21. Broadcom stock closed trading on Tuesday at $443.60, after just over a 5% pop for the day.
Marvell Technology Group Ltd. (NASDAQ: MRVL) is one of the favored mid-cap picks at BofA Securities. It 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.
The analysts have become increasingly positive, noting this when the company reported earnings:
We tweak up our estimates modestly and retain Buy on: 1) unique positioning in markets that could rebound fastest in the second half and 2022 – namely enterprise and global 5G infrastructure deployments; 2) multiple product cycles across cloud, 5G, autos (collectively 25% of sales) and design IP across processors, storage and compute; and 3) ability to monetize Arm server IP, and drive potential synergies from announced Inphi acquisition.
Shareholders receive a 0.55% dividend. The $58 BofA Securities price target is much higher than the consensus target of $23.83. The stock closed at $43.86 a share on Tuesday, which was up over 9% for the day.
These six top companies are market leaders with shares that backed up nicely during the recent technology and semiconductor sell-offs. With a slew of catalysts on the horizon, some very positive tailwinds for demand and a push by the Biden administration to bring chip production back to the United States, these stocks all make sense for aggressive growth investors looking to add positions in the semiconductor space. Given the big moves Tuesday, investors may want to be patient and scale in some capital now and see how things play out near term.
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