Merrill Lynch Says Apple Slowdown Should Not Effect These Top Chip Stocks to Buy

Technology

Published: January 11, 2016 10:35 am

Last Updated: January 13, 2020 3:12 pm

The market has started the year off bad enough without tossing in concerns of a drastic production slowdown at some suppliers of technology giant Apple Inc. (NASDAQ: AAPL). One of the stocks getting hit the hardest is Apple itself, which is down an astonishing 28% from highs that were printed intra-day in April of last year. The meltdown in the stock and the overall market sentiment has hit some top chip stocks hard, and now may be the time to be looking at the casualties.

A new Merrill Lynch research note makes the case that, based on meeting with top corporate executives at the huge Consumer Electronics Show recently, the gloom and doom mentality running rampant may be way overdone. In fact, for many of the top companies the Merrill Lynch team covers, it’s really more of a “business as usual” scenario.

Three top stocks remain high on the charts at Merrill Lynch and are all rated Buy.

Avago

This company made big headlines with a blockbuster buyout of chip giant Broadcom, but it is down nearly 10% so far this year. Avago Technologies Ltd. (NASDAQ: AVGO) was originally a part of Hewlett-Packard and gets a huge chunk of its business from Apple and Samsung. It’s a big provider in the cloud/hyperscale data center and networking sector.

The company recently announced it will demonstrate its latest optical transceiver technologies for next generation data center and enterprise storage applications. As data center networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.

The company produces radio frequency front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10%+ quarter over quarter for the third quarter. The analysts note that customer diversity and content for Samsung could be more than enough to offset slower Apple business.

Merrill Lynch likes the leadership in the mobile, data center and broadband markets. The firm also sees a cyclical rebound in industrial and communications demand but does caution that the integration and financial risk of the Broadcom acquisition could weigh on the stock.

Avago investors receive a 1.37% dividend. Merrill Lynch has a big $180 price target on the stock. The Thomson/First Call consensus target is $171.33. Shares closed on Friday at $128.20.
NXP Semiconductors

This is considered a top play for investors looking for a chip stock with Internet of Things exposure, though it is down a stunning 34% from highs printed in June of 2015. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analyst believe the merger can transform the company into a powerhouse.

The Freescale merger made NXP the fourth largest semiconductor company in the industry. It is also important to note that the combined company would be the number one supplier in auto semiconductors, number one supplier in global microcontrollers and a dominant supplier in mobile payments.

NXP is getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. The two business segments that cover these products grew 39% and 29% year over year, very impressive numbers.

The company reported very mixed third-quarter results, and the forward guidance was way below what Wall Street expected. Some Wall Street analysts feel that if management can successfully convince investors that its long-term growth targets, which are 10% sales growth and 20% earnings-per-share growth, are still viable and intact, the huge sell-off could wind up looking like an outstanding buying opportunity. Merrill Lynch notes that the company sees limited China impact.

Merrill Lynch has a $105 price target, but the consensus target is higher at $106.29. The stock closed Friday at $75.18.

NVIDIA

This is the non-consensus top pick at Merrill Lynch. 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 also moving into visual computing chips for cars, mobile devices and supercomputers. It also has a technology partnership with electric car maker Tesla.

NVIDIA has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

The company most recently posted earnings that were way ahead of estimates, and the first-quarter outlook implies earnings per share well ahead of current consensus. With gaming revenues up 44% year over year, the analysts believe there remains high overall Wall Street skepticism around the company, as most are unaware of the positive dynamics in the PC gaming and e-sports markets.

Some Wall Street analysts feel that virtual reality could see 10 million in annual shipments in three to five years, and NVIDIA will be a huge player. In fact, it’s possible that those shipments could represent as much as $750 million per year for the company and competitor AMD. Merrill Lynch also cites the large Technology Assessment Management Systems in gaming, autos, and the cloud enabled by NVIDIA’s graphics leadership.

Investors receive a 1.4% dividend. The Merrill Lynch price objective is $35. The consensus target is $31.58, and the stock closed Friday at $29.63.