If any sector has been on a roll this year, it’s the semiconductors, and with good reason. With demand for chips skyrocketing in everything from the cloud to cars to gaming, some of the specialized chip stocks have been on fire. While some analysts have pointed to stretched valuations, others feel that, while pricey, the valuations at current levels still allow for some solid upside potential.
In a new SunTrust Robinson Humphrey research note, outstanding chip analyst William Stein says the hot companies in the industry still have room to move higher. He noted this in the note:
Proprietary macro indicator turns positive – Consumer sentiment momentum (our proprietary 5-month leading indicator for semiconductor industry growth) turned positive in September, after only one other positive reading so far in 2016. Our other demand indicators are mostly constructive: inventory momentum is negative (but improving), cycle depth/duration is constructive, and valuation is still slightly attractive.
Stein also recommends investors add these three top companies, which are rated Buy at SunTrust.
This stock has been on a roll this year and is expected to trade even higher. 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. Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
Broadcom investors receive a 1.2% dividend. The SunTrust price target for the stock is $217, and Wall Street consensus price target is $201.55. Shares closed Monday at $170.07.
This is a company that could benefit from continued industrial demand and is another of the SunTrust top picks. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets. Products include high-performance and radiation-hardened analog mixed-signal integrated circuits (ICs), power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.
At the company’s Investor Day last month, Microsemi raised some of its long-term financial forecasts. It expects business to grow organically at 6% to 8% a year and revenues to increase more than $2 billion by 2020. The company also increased its gross and operating margins expectations to 60% or more and 35%, respectively, from 60% and 30% projected earlier.
The company also reviewed a few key areas of growth, and it now expects storage and data center, Ethernet, precise timing ICs, optical transport network processors, aerospace and field-programmable gate arrays to be the catalysts for future continued growth.
SunTrust has a $51 price target. The consensus target is $49.20. The shares closed Monday at $41.38.
This company is considered a top play for investors looking for a chip stock with Internet of Things exposure and is a potential acquisition candidate. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry.
It is also important to note that the combined company has become the number one supplier in auto semiconductors, number one supplier in global microcontrollers, as well as 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. With shares trading at solid discount to some of its peers, many analysts are very positive on the faster earnings growth potential relative to the competition.
The stock traded up over 20% last week after The Wall Street Journal reported that Qualcomm was in negotiations to acquire the chipmaker. Some top analysts feel the purchase price could be $130 or higher.
The $104 SunTrust price target could be higher soon. The consensus target is $107.74. The shares closed Monday at $102.76.
SunTrust is not alone in its praise of these three top companies. They are widely covered on Wall Street and most firms are very bullish. While they are only suitable for aggressive growth accounts, interested investors may want to buy small starting positions and see if the market does not back up some to add more later.