If any industry was on fire for the past few years it was the semiconductors, and with good reason. Semiconductor use in various products from gaming to automobiles to bitcoin mining has exploded. And now, there is actually a shortage that many in the industry believe will last until next year. The good news for aggressive growth investors eyeing the industry is that, despite the strong price action this summer, the massive demand from the shortage doesn’t look to be rectified for some time.
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In a new Jefferies research piece from top-notch chip analyst Mark Lipacis, he and his team turned to supply-chain experts looking for answers. They said this about the current semiconductor landscape:

We were out with our key takeaways from a call we hosted with a supply-chain expert post 10 days of checks. We pointed out that component suppliers have noted “record-high levels” of bookings and billings in the second quarter of 2021 with robust demand across all vertical markets. Additionally, we noted that we are not seeing any typical “cycle-peak signals” such as order cancellations, push-outs, or sudden improvements in lead times. Moreover, we pointed out that the supply chain players do not expect normalization until the second quarter of 2022, particularly as the new IC fabs come online and start commercial production.

Four of the industry’s best companies are the top semiconductor picks at Jefferies, and aggressive growth investors looking for an alpha upside boost for the rest of the summer should consider positions. It is important to remember though that no single analyst report should be used as a sole basis for any buying or selling decision.

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.

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 1.55% dividend. The Jefferies price target for the shares is $188, and the Wall Street consensus target is $185.82. The shares closed on Friday at $160.44 a share.

This top company also is a favored mid-cap pick at Jefferies. Marvell Technology Group Ltd. (NASDAQ: MRVL) 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.
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The company has a unique positioning in markets that could rebound fastest in the second half of the year and into 2022. Top analysts are expecting enterprise and global 5G infrastructure deployments. In addition, multiple product cycles across the cloud, 5G and autos, which collectively are 25% of sales, as well as design internet protocol across processors, storage and computing.

In addition, Marvell has the ability to monetize Arm server internet protocol and drive potential synergies from the company’s Inphi acquisition, which.

Shareholders receive a 0.55% dividend. Jefferies has a $58 price target, though the consensus target is just higher at $59.44. Marvell Technology stock closed at $53.97 on Friday.

Microchip Technology

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.

The company acquired Microsemi in June of 2018, and most analysts 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).

Microchip’s 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 1.19% dividend. The $194 Jefferies price target is well above the $176.39 consensus target. Microchip Technology stock closed most recently at $133.76.

This top chip stock has reported strong earnings the past few years and was absolutely hammered late in the first quarter, but it has rallied back smartly. Nvidia Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
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Nvidia is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

The analyst feels that the company deserves a higher multiple, as Nvidia is on a roadmap to grow its per-share earnings by an impressive compounded annual growth rate of around 37% over the next five years. This is as it builds its ecosystem, starting with chips, switch fabrics, software and artificial intelligence computing systems. The analyst cites downside risks that include demand destruction due to a new, prolonged outbreak of COVID-19 virus, slower PC gaming growth and competition from competitors and new entrants to the deep learning market.

Investors receive just a 0.28% dividend. Jefferies has set an $854 price target. The consensus target is just $757.31. The shares closed on Friday at $726.44, which was down almost 5% on the day.

Note that a 4-for-1 Nvidia stock split will be effective this week. The shares will be distributed after the market closes on Monday, July 19, and the newly split shares will begin trading when the market opens on Tuesday, July 20.

Clearly, the increased demand and diminished product availability will be great for some companies but could put some intense pressure on those needing the semiconductors. Note that these stocks have all had very strong runs, and when they finally do roll over, it could be in a big way. So either go all-in and play them for a trade or, for long-term investors, buy partial positions and scale them into a larger position over a more extended time.

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