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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| July 4, 2018
If you are looking for quality growth investments with compelling valuations, consider the world of semiconductor stocks. Yes, this can be an expensive area of the market, put over the past few months, shares across the industry have pulled back due to concerns of a cyclical peak in demand.
However, analysts are robust in their view that structural changes in the industry are resulting in increasingly sustainable demand. Plus, chip stocks appear to be deeply undervalued (for once), especially when you factor in strong fundamentals like cash flow, earnings and sales.
We used TipRanks’ powerful market data to source the five best semiconductor stocks to buy now. All five of these stocks score a "Strong Buy" analyst consensus rating and big upside potential from the current share price to the average analyst price target. The ratings included here are all from within the last three months to give us the latest insights into the market’s outlook.
Data is as of July 3, 2018.
Market value: $45.2 billion
TipRanks consensus price target: $65.60 (46% upside potential)
TipRanks consensus rating: Strong Buy
Applied Materials (AMAT, $44.80) engineers highly complex manufacturing and process technologies for semiconductor chips and displays. And according to top Stifel Nicolaus analyst Patrick Ho (view Ho’s TipRanks profile), AMAT is now trading at “very attractive” levels. Indeed, his $75 price target represents more than 65% upside potential from the current share price.
Although he factors in a push-out of $250 million of shipments and revenue from Samsung (SSNLF) from 2018 to 2019, Ho writes that Applied Materials’ revisions are more modest than peers. He sees this as further evidence that AMAT has a more broad-based customer pool, and he continues to recommend shares.
One of the best-ranked analysts on TipRanks, B. Riley FBR’s Craig Ellis (view Ellis’ TipRanks profile), agrees with this bullish outlook. He sees shares spiking 56% to hit $70 and calls the current valuation “inexpensive.” “AMAT’s growth story remains the most diversified in large cap Semi (stocks), and we are encouraged with management’s high-quality view through 2019,” he writes.
He reiterated his “Buy” rating following “another stellar quarterly execution performance showing AMAT’s new product engine is firing on all cylinders and producing share gains at surprisingly attractive margins.”
Courtesy Raimond Spekking via Wikimedia
Market value: $103.3 billion
TipRanks consensus price target: $311.86 (29% upside potential)
Global semiconductor company Broadcom (AVGO, $242.05) is consistently one of the Street’s favorite semiconductor stocks. The company has one of the highest free-cash-flow margins in the semiconductor group at greater than 40%. For 2018, AVGO is expected to generate FCF of around $8.5 billion, with half that amount earmarked for dividends.
Broadcom investors currently enjoy a generous dividend yield approaching 3%. Factor into this an aggressive share buyback plan of $12 billion (announced in April) with plenty of cash for future acquisitions, and you can see why AVGO deserves its Triple-A rating.
For top Oppenheimer analyst Rick Schafer (view Schafer’s TipRanks profile) AVGO’s growth/margin/FCF profile make any discount tough to justify. “We see a gradual re-rate as new FCF-focused income investors gravitate to the story,” he writes. Schafer just held a meeting with AVGO execs, following which he reiterated his Buy rating with a $315 price target (30% upside potential).
“The company has the cash flow, operating metrics and capital allocation strategies of a diversified analog company, and the growth opportunities of a mobile/wireless company” Schafer writes. And with this in mind, he believes AVGO deserves to trade at a higher multiple closer to wireless companies given its “superior technology” and “diversified top line.”
Over the past three months, 24 analysts have published bullish Broadcom ratings, with only one analyst staying sidelined.
Market value: $27.4 billion
TipRanks consensus price target: $264.20 (58% upside potential)
Semiconductor equipment specialist Lam Research (LRCX, $167.25) is a leading global supplier of wafer fabrication equipment (WFE). Its systems play a critical role in enabling companies to produce better, faster and more efficient chips. The stock has a sterling rating from top analysts, with 15 recent buy ratings versus just one hold rating.
UBS analyst Timothy Arcuri (view Arcuri’s TipRanks profile) has finally upgraded LRCX from “Hold” to “Buy.” Even his cautious $220 price target indicates robust upside potential of 31%. So what brings him to the bull camp at this late stage in the game? “We have preferred KLA-Tencor (KLAC) since launch, but see now see upside in Lam Research that is too good to ignore,” Arcuri writes. He believes Lam Research has “felt the disproportionate brunt” of Samsung’s memory delays, and that this now sets a very low bar for outperformance.
He isn’t alone in this analysis. Merrill Lynch’s Vivek Arya ( view Arya’s TipRanks profile) believes shares are underpriced, with structural industry changes (diversification of end-demand and increased chip complexity) ensuring sustainable WFE demand.
“With shares currently trading at trough multiples at 9-10x (typical at peak earnings) we see this as a particularly attractive buying opportunity with limited cyclical downside and potential upside,” Arya wrote on June 10. He has a far more bullish price target on the stock of $285 (70% upside potential).
Courtesy Microchip Technology
Market value: $21.2 billion
TipRanks consensus price target: $118.20 (29% upside potential)
This “Strong Buy” semiconductor stock is a leading supplier of microcontrollers and analog processors for customers like the auto industry. The big news for Microchip Technology (MCHP, $91.47) is its recent acquisition of Microsemi. For a whopping $8.35 billion, Microchip Technology snapped up the largest U.S. commercial supplier of military and aerospace semiconductor equipment.
The deal has now closed following antitrust clearance from China. As a result, top Argus analyst Jim Kelleher (view Kelleher’s TipRanks profile) boosted his MCHP price target to $115. This represents 27% upside potential from current levels. He believes the deal will result in operating efficiencies and ultimately margin expansion. Plus, MCHP will strengthen its position in non-tech markets as well as the booming datacenter and communication infrastructure industries.
In a similar move, five-star Mizuho Securities analyst Vijay Rakesh (view Rakesh’s TipRanks profile) bumped up his price target to $110. He also raised his MCHP estimates, writing, “While we believe there are fewer synergies with MSCC, Aerospace/Defense and Communication provide attractive diversification of MCHP’s portfolio while storage should add growth.” Specifically, MCHP is modeling for 75 cents per share in annual accretion during the first year, then $1.75 per share in the second.
Bear in mind that out of the stock’s 10 recent analyst ratings, nine are bullish and only one is neutral.
Market value: $59.7 billion
TipRanks consensus price target: $82.80 (52% upside potential)
Red-hot chip stock Micron (MU, $54.48) describes itself as the world leader in innovative memory solutions. The company has had a tremendous run recently- exploding by 70% on a one-year-basis. And luckily for investors, top analysts are confident that further growth lies ahead.
Top Benchmark analyst Mike Burton (view Burton’s TipRanks profile) has just initiated coverage on MU. His rating comes with a bullish $80 price target (48% upside potential). “We believe MU has progressed from a ‘cash burn’ to a ‘cash return’ story in only two years, and we expect the stock to remain a cyclical growth name, generating increasing profits and cash flow on each respective high and low of the memory cycle,” Burton writes.
He is confident that concerns about an upcoming cyclical weakness are unfounded. Instead, Burton writes, “We see little evidence of a supply glut in MU’s DRAM business heading into 2H18 (or until significant wafers are added due to structural tightness), and we are encouraged that its product roadmap extends another 4 generations.”
The overall analyst consensus mirrors this optimism. In the past three months, 17 analysts have published MU buy ratings vs just four hold ratings. Even longtime Micron bear UBS analyst Timothy Arcuri has just upgraded the stock from “Sell” to “Hold” and ramped up his price target from $42 to $60. He cites a sizable DRAM production delay from Micron rival Samsung. This limited supply is good news for Micron – one of only three major DRAM suppliers.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 4,700 Wall Street analysts as well as hedge funds and insiders. You can find more of TipRanks’ stock insights here.