Think about anybody you know that has purchased a new car recently and how vastly different those cars are from even a short 10 years ago. Cars and trucks now have extensive computer systems for not only the actual functioning of the vehicle, but for accessing the internet, streaming audio and video and much more. In other words, mobile technology that is literally mobile.
In a new research primer on the top U.S. semiconductor companies, Vivek Arya, the outstanding chip analyst at Merrill Lynch, highlights four top picks in the industry. Two are considered the best consolidators, and two are companies in the middle of a huge transformation. While concerns have weighed on the industry due to the maturing personal computer and mobile markets, growth in the automobile, cloud and Internet of Things arena will help drive future growth.
The four top picks at Merrill Lynch are all rated Buy.
This is the combined entity that was formerly known as Avago and Broadcom, and a stock that resides on the 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. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that the company has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or more quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.
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. Merrill Lynch sees the company as a top consolidator as it receives revenue from smartphones, data center switching, set-top boxes and cable broadband.
Broadcom investors receive a 1.3% dividend. The Merrill Lynch price target is a whopping $200, and Thomson/First Call consensus price target is $178.89. Shares closed Monday at $142.40.
This leader in semiconductors is working hard to scale away from dependence on personal computers. 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.
The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.
Intel announced a massive restructuring recently, which also included a large number of layoffs. The company is moving away from its slow-growth businesses and will be using the cash saved to expand its high-growth businesses of data center, Internet of Things and memory, all transformational revenue silos that the Merrill Lynch team is bullish on.
The company reported an inline first quarter, and lowered the forward outlook. Merrill Lynch stays positive on the company and believes there is solid upside potential for the stock. Some analysts think the restructuring can ultimately translate to 0.23 in annual earnings-per-share savings.
Intel investors receive a 3.48% dividend. Merrill Lynch $36 has a price target. The consensus target is $35.41. Shares closed on Monday at $29.80.