Merrill Lynch Very Cautious on Three Well-Known Chip Stocks

By Lee Jackson Published Jul 14, 10:20AM EDT

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While most of the Wall Street firms we cover are cautiously optimistic for the chip sector for the second quarter and going forward, high multiples could limit the upside for even the best names. With the iPhone 6 vendors most likely receiving orders, some of the top names will benefit strongly in the third quarter, as a mid to late fall release for the highly anticipated device is expected.

A new report from Merrill Lynch highlights the top semiconductor names, and it also points to three stocks the firm is very cautious on. We have featured many of the top names to buy recently, and will continue to during earnings season. However, investors may want to examine their portfolios to see if they own the three names that Merrill Lynch has rated at Underperform.

Fairchild Semiconductor International Inc. (NASDAQ: FCS) makes the Underperform list and may be a smaller cap name for investors to consider selling. With it trading at 17 times 2015 earnings, the Merrill Lynch analysts see the stock at a large premium to its five-year median multiple of 13 times earnings.

They also cite downside pressures that could come from a slowdown in the cycle, inventory correction, margin pressures and slower-than-expected sales growth. This is crucial as analog chips have long product cycles that could mask competitive issues and/or share shifts, especially if PC and consumer markets weaken. If Merrill Lynch is right, there could be some significant downside coming. The Merrill Lynch price target for the stock is $12. The Thomson/First Call consensus target is $15. Shares traded Monday morning at $15.40.

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Marvell Technology Group Ltd. (NASDAQ: MRVL) is a tech stock investors have waited on for years for its ship to come in, and according to Merrill Lynch, they may have to continue waiting. The analysts concede there are some positives that have emerged for the company in the last year.

The team also pointed out Marvell’s gross margin declines in lower margin wireless products, a very competitive applications processor market. Another risk is a large vendor loss as a negative. The Merrill Lynch price target is $14, and the consensus target is $16.74. Marvel traded Monday morning at $14.05.

NVIDIA Corp. (NASDAQ: NVDA) remains Silicon Valley’s top graphics chip company, and many on Wall Street, even those who are positive on the stock, have cautioned investors to look for perhaps a better entry point.

The Merrill Lynch team feels that NVIDIA’s stock on a multiple basis is fully valued at current levels. They point to risks like decelerating margins, lack of visibility around growth drivers and intense competition that could likely keep a lid on any major multiple expansion in the foreseeable future. The Merrill Lynch price target is $19, while the consensus number is at $19.27. Shares traded at $19.13 Monday morning.

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Clearly Merrill Lynch is not pounding the table to short these stocks, as they all have merit and reasonably stable business. The key aspect for all three is that the analysts see them as fully valued at these levels. With that in mind, any earnings miss or weak forward guidance could hit the stocks hard. In other words, no room for error.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.