If any investor has stood the test of time, it is Warren Buffett. For years, the “Oracle of Omaha” has had a rock-star-like presence in the investing world. His annual Berkshire Hathaway shareholders meeting draws literally tens of thousands of loyal fans who are also investors. Known for his long buy-and-hold strategies, and with a massive portfolio of public and private holdings, he remains one of the preeminent investors in the entire world.
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Those that follow the investing legend know that, aside from a massive position in Apple, Buffett largely steers clear of technology stocks. He stated years ago he did not want to own companies he did not understand. While the Berkshire Hathaway portfolio holds a few additional positions in the sector, the amount is very limited.
That all changed this week when the legendary investor took a massive $5 billion stake in Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM | TSM Price Prediction). Though it has been crushed over the past year, with the demand for chips expected to continue skyrocketing in cars, appliances and, of course, advanced chips for Apple’s computers and phones, the stock has a ton of potential at current levels.
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Given this huge $60 million American depository receipts purchase, we thought it interesting that BofA Securities recently said it is time to start putting a foot in the proverbial semiconductor investing waters. Its recent research report highlights the top themes for the sector and the firm’s top picks. We picked one stock from each theme. 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.
The BofA team noted this in its report on semiconductors and semiconductor capital equipment:
Macro trends remain fluid but we think seasonal trends and desire to look to the second half of 2023 and 2024 recovery could re-attract investors to chip stocks. Bears will likely argue consumer demand remains under pressure; seasonal boost could fade and US/China conflict exposes semiconductors to unique risks. However, we think the bull case for semiconductors is also compelling.
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Chipmaking
Applied Materials Inc. (NASDAQ: AMAT) is one of the premier semiconductor capital equipment stocks. It provides manufacturing equipment, services and software to the semiconductor, display and related industries. It operates through three segments.
The Semiconductor Systems segment develops, manufactures and sells various manufacturing equipment that is used to fabricate semiconductor chips or integrated circuits. This segment also offers various technologies, including epitaxy, ion implantation, oxidation/nitridation, rapid thermal processing, physical vapor deposition, chemical vapor deposition, chemical mechanical planarization, electrochemical deposition, atomic layer deposition, etching and selective deposition and removal, as well as metrology and inspection tools.
The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity comprising spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products.
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The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays, organic light-emitting diodes and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smartphones and other consumer-oriented devices, as well as equipment for processing flexible substrates.
Investors receive a 0.97% dividend. The BofA Securities target price for Applied Materials stock is $117. The consensus target is lower at $107.39, and shares closed trading on Tuesday at $110.46.
Automobiles, Including 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 and automotive 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.
Shareholders receive a 1.99% dividend. BofA Securities has a $200 price target, while the consensus target is just $179.00. NXP Semiconductors stock closed at $174.81 on Tuesday.
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Cloud and Connectivity
Nvidia Corp. (NASDAQ: NVDA) made a huge purchase in 2020 that can help provide a solid tailwind for the company. This sector leader rarely has grown through acquisitions, but it bought Mellanox for a whopping $6.9 billion in cash.
Nvidia provides graphics and computing and networking solutions in the United States, Taiwan, China, and elsewhere. Its Graphics segment offers GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro/Nvidia RTX GPUs for enterprise workstation graphics; vGPU software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse software for building 3D designs and virtual worlds.
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The Compute & Networking segment provides data center platforms and systems for AI, HPC and accelerated computing; Mellanox networking and interconnect solutions; automotive AI Cockpit, autonomous driving development agreements, and autonomous vehicle solutions; cryptocurrency mining processors; Jetson for robotics and other embedded platforms; and Nvidia AI Enterprise and other software.
The company’s products are used in gaming, professional visualization, data center and automotive markets. It sells its products to original equipment manufacturers, original device manufacturers, system builders, add-in board manufacturers, retailers/distributors, independent software vendors, internet and cloud service providers, automotive manufacturers and tier-1 automotive suppliers, mapping companies, start-ups and other ecosystem participants.
The $205 BofA Securities price objective is well above the $189.37 consensus target for Nvidia stock. Shares closed on Tuesday at $166.66.
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Cash Flow Consistency
Analog Devices Inc. (NASDAQ: ADI) stock could very well continue to benefit from the increase in information technology and 5G spending. The company is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits (ICs) 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 comes with a 1.85% dividend. The BofA Securities team has set a $190 price target. The consensus target is $187.91, and shares closed at $165.17 on Tuesday.
Conflict
The BofA Securities team said this about risks and alternatives to Taiwan Semiconductor:
While there is no ready substitute for Taiwan and TSMC, and any regional conflict would be negative for all chip stocks, we do believe just that persistent threat could drive more market share and US/EU government subsidies towards the competition.
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Based in New York, GlobalFoundries Inc. (NASDAQ: GFS) could be the go-to company if the United States and China have geopolitical skirmishes. It is the fourth largest outsourced semiconductor manufacturer (aka foundry) and is the last remaining U.S.-based pure-play foundry at this time.
GlobalFoundries manufactures complex, feature-rich ICs addressing mission-critical applications in smart mobile devices, personal computing, communication infrastructure and data center, home and industrial Internet of Things (IoT) and automotive markets.
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The BofA team sees sales growth for the company in 2023 and reiterated recently that the company is uniquely positioned to capture market/investor share, as the only scale foundry without a China/Taiwan footprint.
GlobalFoundries stock on the BofA Securities US 1 list of top stock picks. The firm recently raised its $75 target price to $80, well above the $70.14 consensus target. Tuesday’s close was at $66.58 a share.
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Making a big purchase in the sector now still would be fraught with risks. The BofA Securities analysts are clear that they think next year and beyond is when the tide can turn in a big way. In addition, there is a very good chance that the recent stock market rally is nothing more than a bear market short-covering move. With that caveat in place, for aggressive growth investors it makes sense to nibble on some of these top ideas now, while leaving plenty of dry powder in case the market takes another big leg down, which is entirely possible.
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