Internet of Things Potential Gigantic for Semiconductors: 5 Stocks to Buy Now

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The Internet of Things (IoT) is hardly new to most technology investors. But one thing is for sure, it may be the most explosive growth driver in the history of the semiconductor space. In fact, in a new research report, Merrill Lynch feels that technology is so big going forward that low-power IoT chips could be in almost 1 trillion devices over the next 20 years.

The Merrill Lynch team also notes in the report the keys to success for the IoT chips is the ability for processing, sensing, connectivity know-how, and most importantly, the ability to generate profits in a high volume, quick turnover marketplace. With the potential for chip sales to double to $34 billion by 2020, companies with direct exposure are sitting pretty.

The analysts point to five stocks rated Buy at Merrill Lynch as long-term beneficiaries of the massive IoT trends: two large cap old-school leaders and three other smaller players that more aggressive accounts may like.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers, and the IoT is a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Earlier this year the company announced the purchase of Mobileye for $15.3 billion. The Israel sensor company gives the chip giant a leg up in the autonomous car competition, and it also adds many other capabilities. While some say the valuation paid is high, this is a big IoT segment going forward.

Intel investors are paid a solid 2.96% dividend. The Merrill Lynch price target for the stock is $42, while the Wall Street consensus target is $39.97. The stock closed Tuesday at $36.87 per share.

Texas Instruments

This company that has come back into favor big-time, and it was also a top first-quarter pick. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.

In the most recent quarter, the company consensus estimates on both the top and bottom lines. Reported revenues for the first quarter of 2017 were up 13.1% year over year, due in part to greater demand in its automotive and industrial sectors.

Texas Instruments also increased its quarterly dividend earlier this year by 32% to $0.50 per share, or $2.00 annualized. The increase reflects its continued strength in free cash flow generation and its commitment to return excess cash to shareholders.

Investors in Texas Instrument are paid a solid 2.43% dividend. Merrill Lynch has a $92 price target for the stock, while the consensus price objective is lower at $82.11. The shares closed higher than that on Tuesday, at $82.36.