Just when you thought an industry that has been on fire couldn’t go any higher, the Semiconductor Industry Association recently announced that chip sales hit a record $35 billion in August, which represented an increase on a sequential basis for the 13th consecutive month. The latest forecast indicates that, led by very strong sales of memory chips, overall sales are expected to be up 11.5% this year, the strongest year for the industry since 2010.
The problem for aggressive investors looking to add stocks or stay in the sector is that many of the top stocks have had massive runs and look fully valued. We screened the Merrill Lynch research universe for chip stocks rated Buy that look to have some solid upside potential. These four look very attractive now.
After years of frustrating performance, Advanced Micro Devices Inc. (NYSE: AMD) appears to have turned the corner and is a hot commodity on Wall Street. It is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.
The analyst feels that AMD, which is releasing the first major offering in five years, the Ryzen chipset, is in his words “uniquely positioned” to compete with the big players like Intel and Nvidia in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.
Recently, CNBC reported that Tesla is working with the company to refine an artificial intelligence (AI) chip for autonomous driving tasks in its cars. Top analysts think the unconfirmed partnership would make sense, though most would not expect the shipment of AMD chips to Tesla to have a material impact near term. Clearly, this would constitute a critical win for AMD and support the thesis that the company is a primary beneficiary of the shift to parallel processing graphics processing units.
The Merrill Lynch price target for the stock is $18, and the Wall Street consensus target is $14.23. Shares traded on Thursday at $13.25.
Maxim Integrated Products
This company supplies some chips to Samsung for the red-hot Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal integrated circuits worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.
Regardless of which processor wins supremacy in automotive segment over the next couple of years, Maxim stands poised to benefit with its Power Management and SERDES content as autonomous cars require leading power efficiency and data distribution. Moreover, the company should see a linear benefit with additional content needed for greater levels of autonomous-driving features in future generations of automobiles.
Merrill Lynch has a price objective of $51. The consensus price target is $47.96, but shares traded on Thursday at $48.40.
Micron Technology Inc. (NASDAQ: MU) is a global leader in advanced semiconductor systems. Its broad portfolio of high-performance memory technologies, including DRAM, NAND and NOR flash, is the basis for solid state drives, modules, multichip packages and other system solutions. Its memory chip solutions enable the world’s most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.
Micron and Intel announced last year the availability of their 3D NAND technology, the world’s highest-density flash memory. Flash is the storage technology used inside the lightest laptops, fastest data centers and nearly every cell phone, tablet and mobile device.
Here are three big positives for Micron for the rest of 2017 and beyond:
- Lack of wafer supply for DRAM with limited new node migration.
- Continued tightness in NAND, which the analysts feel is driven by slower industry transition to 3D combined with an increase in enterprise SSD bit growth.
- Price increases across NAND flash’s three key segments, along with mix improvement, all of which bode well for the company’s NAND profitability for 2017.
The $55 Merrill Lynch price target compares with the consensus target of $48.78. Shares traded on Thursday at $39.50.
This is a smaller cap play that aggressive accounts may want to look at. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits (ICs) and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications.
The company is in the midst of a transformation from a seller of commodity discrete chips into higher value added analog ICs both through organic growth and acquisitions. It is a leading sensor company, and the analysts noted this in the report while also citing a delivered balance sheet and positive cash flow as big positives going forward:
The analysts view ON as an underappreciated way for investors to benefit from the emergence of ADAS and eventually Autonomous Driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, many continue to see structural upside for the shares.
Merrill Lynch has set its price target at $23, and the consensus target is $19.55. Shares traded Thursday at $19.00.
Four top semiconductor stocks that have gigantic growth potential, and when you add in the additional Internet of Things possibilities and other industrial applications, there appears to be tremendous upside potential. These stocks have all run, so it may make sense to buy partial positions now and see how earnings for the quarter come in.