Why This Wall Street Firm Is Still Very Bullish on Semiconductors for 2022

One of the biggest financial and economic stories of this year has been the supply chain issues that have plagued business and consumers from top to bottom in virtually every sector. While reasons to explain this ongoing problem are numerous, the reality is that things are slowly improving. In 2022, we should see a reprieve from the current status.

One segment that has been in the spotlight is the semiconductor arena, and the lack of supply for everybody from automobile makers to technology companies has handcuffed production for most of 2021. In a new report from the semiconductor team at Truist Securities, while acknowledging the strong gains the sector has made over the past few years, they feel there is still positive upside potential to current estimates.
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Their report noted this:

We remain bullish on semi stocks owing to our expectation for fundamental upside potential over the next few quarters. The fundamental cycle is past peak and fading, and stocks have delivered robust returns. Still, we expect revenue growth in 2022 to modestly exceed the consensus +9% view. Supply remains constrained, but is growing modestly. Demand is robust, and will benefit from fiscal stimulus, supporting upside.

Nine top companies are the firm’s favorite ideas for 2022, and here we focus on four of the sector giants that are Buy-rated at Truist Securities. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Analog Devices

This stock could very well continue to benefit from the increase in information technology and 5G spending. Analog Devices Inc. (NASDAQ: ADI | ADI Price Prediction) 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. The analysts had this to say:

Our constructive view on the company is principally owing to the company’s ongoing alignment with our industrialization of semis view. That is, the company can create significant shareholder value by transitioning its targets from safety-oriented metrics like GPM and net cash, to growth-oriented metrics like sales growth, EPS growth, and free-cash-flow growth.

Analog Devices stock investors receive a 1.55% dividend. Truist Securities has a $206 price target. The consensus target is slightly higher at $207.36, and shares closed on Tuesday at $176.28.
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This tech leader has reported solid earnings this year and is a top pick at Truist for dividend growth in 2022. 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.
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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, servers and storage, factory automation, power generation and alternative energy systems and displays.

The analysts said this about the incredible diversity of the company:

We expect Broadcom’s diversified semi & software franchises to deliver MSD sales growth through a cycle, and that combining this with margin expansion and capital allocation (buybacks and acquisitions) should drive double digit growth in free-cash-flow and dividends per share. We came away from its recent Software Analyst Day recognizing more similarities than differences relative to its semiconductor business, including a focus on a small number of products, a small number of large customers, and an R&D focus to ensure the health and sustainability of the franchise. We also are constructive on the recent $10b share repurchase authorization which represents ~4.2% of the company’s market cap.

The dividend yield is 2.64%. The Truist Securities price target for Broadcom stock is $659, while the consensus target is $658.60. Shares closed on Tuesday at $614.91.
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Monolithic Power Systems

This is an off-the-radar play that has remained a favorite over the years at Truist. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments.

The company offers direct current (DC) to DC converter integrated circuits used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.

The company also provides lighting control integrated circuits for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.

The Truist team said this in the research report:

We view the company as a unique asset in semis: A small-midcap diversified supplier in the early stages of a multi year structural growth & margin expansion. Monolithic Power Systems is in the early stages of transitioning from a semi device supplier to a broader solutions provider, boosting revenue & margins over time. Our key takeaway from our recent NDR is that the company is capitalizing on out-sized growth opportunities in the near and medium term from a combination of capacity advantage, accelerating new designs, and emerging capital allocation (tuck-in acquisitions and acqui-hire opportunities).

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Monolithic Power Systems stock investors receive a 0.50% dividend. The $613 Truist price objective is well above the $603.29 consensus figure. Tuesday’s closing share price was $477.92.

Nvidia

This heavyweight chip stock has reported strong earnings and has been a top pick at Truist and across Wall Street for some time. 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.

Nvidia is well invested 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. Like most of Wall Street, the Truist analysts love the company:

We continue to believe Nvidia’s exposure to some of the most exciting areas of growth in tech (metaverse development, AI training & inference, gaming / e-sports, autonomous driving, and server acceleration) will drive well above industry growth over the next few years. We believe its competitive positioning derives less from its chips, and more from its software investment, culture of innovation, and ecosystem of incumbency. The company is the leader in semi & software technology for AI that drives structural growth. Industry contacts reflect datacenter end market growth is likely to continue at a robust clip, and potentially accelerate, during 2022, reinforcing our more constructive view on the stock.

Investors receive just a 0.06% dividend. Truist Securities has set its price target at $389. The consensus target is just $339.25. Nvidia stock closed at $278.55 on Tuesday.
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There is no denying the parabolic move the industry and these stocks have made over the past few. Any swift downside move could cause them to tumble more than many other stocks. Yet, these are the true industry leaders and giants that have a tailwind for the future. It may make sense to Buy partial positions and see if we don’t get a January risk-off move.
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