It is no secret that the semiconductor arena is trading at a premium valuation, and in a deep market sell-off they could get hit extremely hard. With that in mind, historically the calendar fourth and first quarters are what one Wall Street firm refers to as the “Golden Period” for the segment, and with good reason. It typically outperforms the overall market by 2.5% during that period.
A new Merrill Lynch research report lists five top chip picks for the rest of 2016. The top companies have exposure to Apple Inc. (NASDAQ: AAPL), which is surging due to the popularity of the new iPhone 7, the huge growth in cloud computing and storage, and the gaming and auto sectors, where demand is also big.
All five stocks are of course rated Buy at Merrill Lynch and seem better suited for aggressive growth accounts.
This is the combined entity formerly known separately as Avago and Broadcom, and it is a member of the prestigious Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.
Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
The company produces radio frequency (RF) front-end for LTE-enabled Apple products, and Wall Street estimates that it does 15% of its total business with iPhone maker. It also has between 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or so quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.
Broadcom investors receive a 1.18% dividend. The Merrill Lynch price target for the stock is $215, and Wall Street consensus price target is $202.34. Shares closed Thursday at $172.72.
This company is a strong contender in the data center arena. Inphi Corp. (NYSE: IPHI) provides high-speed analog and mixed signal semiconductor solutions for the communications, data center and computing markets worldwide. The company’s end-to-end data transport platform delivers high signal integrity at leading-edge data speeds, addressing performance and bandwidth bottlenecks in networks, from fiber to memory. Inphi has solutions to minimize latency in computing environments and enable the roll-out of next-generation communications infrastructure.
Many on Wall Street feel that the battle for dominance in outsourced cloud services between Amazon, Google, Microsoft and others should continue to drive growth in data center capital expenditures. The analysts feel that cloud data center customers are more likely to embrace Inphi’s exciting 100G products like the PAM-4 solutions, ColorZ and others.
Merrill Lynch has a $44 price target for the stock, and the consensus target is $43. Shares closed Thursday at $40.07.