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By Maya Sasson, Contributing Writer | October 17, 2019
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Investors' focus has locked in on semiconductor stocks following news of a potential "phase one" trade deal between the U.S. and China. Many chipmakers do production work in China and/or distribute products to Chinese companies, so the industry has suffered a nasty case of whiplash throughout the two or so years of the two countries' tariff spat.
The upside is that the volatility still is coming out on their side. The iShares PHLX Semiconductor ETF (SOXX) has soared nearly 40% year-to-date, doubling the already better-than-average returns for the S&P 500. While trade enthusiasm has helped, the industry also is recovering from inflated inventory levels that have weighed heavily on the space.
SunTrust Robinson Humphrey analyst William Stein wrote in October, "Looking through any tactical correction (due to tariffs), the big move is still to the upside. We believe patient investors will be rewarded for being long semis." And Goldman Sachs' Toshiya Hari wrote in July that chipmaking equipment companies' fundamentals could improve "sooner than previously expected."
Here are five semiconductor stocks to buy to take advantage of an improving outlook for the industry. We took advantage of TipRanks' Stock Screener tool to pinpoint five chip stocks that have recently accumulated bullish sentiment from Wall Street analysts. Let's take a look.
Data is as of Oct. 16.
Market value: $22.9 billion
TipRanks consensus price target: $108.11 (13% upside potential)
TipRanks consensus rating: Strong Buy
Microchip Technology (MCHP, $96.08) is a semiconductor company that manufacturer of microcontrollers, analog chips and other products. These products are used to power everything from home appliances to medical devices to space travel.
MCHP recently got a shot in the arm thanks to an Oct. 1 vote of confidence from KeyBanc's Weston Twigg. The analyst believes the demand-and-inventory issues that bogged semiconductor stocks down last year are subsiding for a few companies, namely MCHP. "We were encouraged to find inventories beginning to normalize and expectations for normal seasonality in 4Q," he writes.
Twigg upgraded Microchip from Sector Weight (equivalent of Hold) to Overweight (equivalent of Buy) and set a $110 price target, implying 14% upside over the next 12 months.
Twigg isn't alone. Over the past three months, Microchip has received eight Buy ratings versus just one Hold. Among the Buys is B. Riley FBR's Craig Ellis, who highlighted Microchip's ability to manage inventory levels. "MCHP was characteristically early in flagging a correction in August 2018 and then responding with assertive inventory management thereafter." Ellis has a Buy rating and a $120 price target on Microchip shares, implying 25% upside. Find out how other top analysts rated MCHP on TipRanks.
Market value: $7.8 billion
TipRanks consensus price target: $23.46 (24% upside potential)
ON Semiconductor (ON, $18.97) produces a wide variety of custom, discrete and logic semiconductors across several continents. It gets about a third of its revenues from automotive clients, though its products are used in a variety of industries, from communications to computers to aerospace and defense.
ON shares are up 17% year-to-date, which is only a little behind the market but significantly behind the SOXX. Nonetheless, its positioning in the "fastest growing semiconductor end-markets," as CFO Bernard Gutmann said in the most recent earnings call, has several Wall Street analysts keeping ON among their top semiconductor stocks to buy.
Benchmark's Ruben Roy is among the analysts singing ON's praises. "Many of ON's focus market design wins are single-sourced as opposed to being multi-sourced in the computing and consumer markets, which ultimately should lead to more stability in top-line performance," he writes. Roy, who also expects the company's shift toward higher-end markets to drive margin improvements, rates ON a Buy with a $26 price target (37% upside).
Raymond James analyst Chris Caso is optimistic, too. While he points out that the company is exposed to trade war and macro-economic threats, he believes investors should buy the stock for its "reasonable" valuation. He raised ON from Market Perform (equivalent of Hold) to Strong Buy and set a $21 price target, implying another 11% upside potential from current prices. See ON's analyst consensus and average price target breakdown on TipRanks.
Market value: $40.9 billion
TipRanks consensus price target: $123.43 (12% upside potential)
Analog Devices (ADI, $110.59) is another analog producer that also offers mixed-signal and DSP integrated circuits. Shares are up 29% year-to-date, and analysts see further upside in part because of the promise of its multiple-input multiple-output (MIMO) technology.
MIMO, and "massive MIMO," use groups of antennas to allow devices to transmit more data, making wireless spectrum more efficient. Among other things, telecoms see massive MIMO as important to unlocking the true potential of the 5G technology they're rolling out.
According to Barclays' Blayne Curtis, the massive MIMO and millimeter wave (mmWave) silicon market could double to $6 billion by 2022. He believes Analog Devices is best positioned to benefit from this emerging space, calling ADI the "clearest winner in Massive MIMO." Curtis upgraded ADI to Overweight in September and lifted his price target from $105 to $130, which is 18% better than current prices.
Loop Capital analyst Cody Acree (Buy) delivered a smaller price-target update, from $120 per share to $125, in September. He believes 2020 will be a "stronger environment" for semiconductor stocks, and that Analog Devices will get a boost from its hyper-scale datacenter products. He also thinks the inventory correction will help out ADI's industrial business, which makes up about half of sales. Take a closer look at what other Wall Street analysts think about ADI.
Market value: $33.9 billion
TipRanks consensus price target: $33.29 (8% upside potential)
TipRanks consensus rating: Moderate Buy
Advanced Micro Devices (AMD, $30.81) is a semiconductor company that develops graphic processors, motherboards and microprocessors. But it has really made a name for itself in recent years with its Ryzen CPU that has given Dow stock Intel (INTC) a run for its money.
In fact, AMD recently scored another win against its larger rival: Microsoft's (MSFT) new Surface Laptop 3 and Surface Pro X will be powered not by Intel, but by AMD Ryzen processors.
To be clear, analysts aren't gushing about AMD at the moment. The "smart money's" sentiment is more bullish than it isn't – it has 8 Buys versus 1 Sell over the past three months – but 12 analysts are sitting on the sidelines, maintaining Hold ratings as they wait for more clarity.
Still, Rosenblatt Securities analyst Hans Mosesmann argues that the Microsoft collaboration is an impressive victory for AMD. "Huge win for AMD with a semi custom APU with integrated graphics (aka APUs) for the new Microsoft device (first time at 15-inch)," he writes, adding, "This is just the beginning of the relationship with AMD, as next year AMD rolls out even higher performance 7nm CPUs and APUs."
"Note that the street is reluctant to believe Intel would allow AMD to take leadership in desktops, much less laptops or servers," continues Mosesmann, who reiterated a Buy rating and $42 price target, or 36% upside. "This is a multi-year AMD cycle."
Nomura's David Wong sees more upside on top of AMD's 67% year-to-date run, too. Wong reiterated his Buy rating Oct. 1, shortly after the company announced the availability of a pair of professional desktop processors built on its groundbreaking 7-nanometer technology. That follows its launch of the first 7nm CPU, the Epyc Rome, in August.
"We think that AMD is doing an excellent job of executing on its 7nm product roadmap and that this lineup of new products will help it continue to drive desktop processor market share gains in the coming quarters," writes Wong, who reiterated a Buy rating and $37 price target (20% upside). Get the scoop on Advanced Micro Device's analyst consensus at TipRanks.
Market value: $118.3 billion
TipRanks consensus price target: $191.59 (1% downside potential)
Nvidia (NVDA, $194.21) actually rates among many analysts' top semiconductor stocks to buy, despite its price target implying a small amount of downside from current prices. NVDA has garnered 20 Buys versus just five Holds and two Sells over the past three months. Nvidia's shares have shot up a quick 16% over the past three months, however, reaching those price targets more quickly than some analysts expected.
What's important to watch out for next is whether analysts start upgrading those price targets in response.
According to Evercore ISI analyst C.J. Muse, investors should also pay close attention to the growing demand for gaming notebooks that feature Nvidia's GPUs. Muse said earlier this month that Nvidia could start enjoying a boost this year that continues will into 2020. He believes the company's Gaming division could experience at least 15% annual growth through 2022 – and that's before considering business wins for its cloud gaming products. Muse has an Outperform rating (equivalent of Buy) on the stock, but more importantly, he raised his price target from $185, which NVDA has surpassed, to $225, which adds another 16% upside.
RBC Capital's Mitch Steves is on the same page, predicting in October that Nvidia will be the "best-performing large cap in our universe over the next six to nine months" thanks to its datacenter, gaming and auto segments. Indeed, Steves thinks the datacenter business could double in the near term. He also bumped up his price target from $190 to $217 (12% upside). Discover what the rest of the Street has to say about NVDA.
Maya Sasson is a content writer at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.