If you thought the opportunities for semiconductors were big now, how about tossing another $100 billion in coming applications over the next five years. That’s right, between artificial intelligence (AI), the Internet of Things (IoT), 5G, virtual and augmented reality and autonomous cars, the $350 billion market for chips is expected to jump to $450 billion by 2022, and investors who own the right stocks may be in for a ride even more significant than the current one in the sector.
In a new Merrill Lynch research report, the outstanding semiconductor analyst Vivek Arya also makes the case that with cloud providers adopting new technology key semiconductor companies that provide critical sensing, processing and connectivity functions are increasingly in demand. He and his team focus on five companies to own for the next five years, all of which are rated Buy at Merrill Lynch.
This stock has been on fire over the last year and not only remains a top pick across Wall Street but is also on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
Applications for Broadcom’s products in its 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.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. Broadcom will report its most recent quarterly results at the end of this month.
Broadcom investors receive a 1.7% dividend. Merrill Lynch has a $260 price target on the stock. The Wall Street consensus target is $249.03. Shares closed Tuesday at $240.68.
This stock has been a Wall Street favorite for some time and Merrill Lynch recently raised it to a Buy rating. Cavium Inc. (NASDAQ: CAVM) designs, develops and markets semiconductor processors for intelligent and secure networks in the United States and internationally. It offers integrated semiconductor processors for wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. The company’s products also include a suite of embedded security protocols that enable unified threat management, secure connectivity, network perimeter protection and deep packet inspection.
The analyst feels the company’s multicore processor and security design acumen make it perhaps the only chip vendor that can challenge Broadcom and Intel by taking advantage of rapid and changing technology adoption by the cloud providers and the 5G mobile era, which is in the not-too-distant future.
In addition, numerous strategic acquisitions combined with the recovery of the company’s core organic product sales can help drive growth. Plus, the analyst notes the stock was essentially flat the past two years versus the huge run in the sector.
The $85 Merrill Lynch price target is a Wall Street high. The consensus target is $78.16, and shares closed on Tuesday at $75.48.