Semiconductor stocks were on fire last year, with the PHLX Semiconductor Sector (SOX) index up a stunning 32%. Most of Wall Street was focused on the large cap companies like Broadcom and NVIDIA, the latter of which was the top performing stock in the S&P 500 in 2017. The bottom line is while they are outstanding companies, much of the money has been made as they were both up huge last year. The question for investors now is, with a very pricey market, where are the chip bargains?
Merrill Lynch’s outstanding semiconductor analyst Vivek Arya has focused his attention on three mid-cap companies that he feels could be outstanding stocks to own. They all could prove to be very disruptive in the pace and may be poised to challenge even the biggest companies in the sector. All three are rated Buy at Merrill Lynch.
Advanced Micro Devices
After years of frustrating performance, this company appears to have turned the corner and is a hot commodity on Wall Street. Advanced Micro Devices Inc. (NYSE: AMD) 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.
The Merrill Lynch price target for the stock is $16.50, and the Wall Street consensus target is $11.79. Shares closed most recently at $13.90.
Merrill Lynch recently raised this long-time Wall Street favorite 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 $73.64, and shares closed trading on Thursday at $65.78.
This stock is still down from highs posted in 2015. Cypress Semiconductor Corp. (NASDAQ: CY) produces high-performance, high-quality solutions for some of the most advanced embedded systems, from automotive, industrial and networking platforms to highly interactive consumer and mobile devices.
The broad, differentiated product portfolio that includes NOR flash memories, F-RAM and SRAM, Traveo microcontrollers, the industry’s only programmable system-on-chip (PSoC) solutions, analog and power management integrated circuits (PMICs), CapSense capacitive touch-sensing controllers and Wireless BLE Bluetooth low-energy and USB connectivity solutions.
The company has continued an expansion of its automotive portfolio, which will help enable manufacturers to bring high-tech automotive systems historically available only in luxury models to mainstream vehicles. Leveraging a wide range of differentiated products that includes microcontrollers (MCUs), PMICs, memories and touch-sensing solutions, the portfolio enables value-added systems for Cypress’s top tier automotive customers.
The analyst feels the company is a very compelling restructuring situation with new management at the helm. Poor decisions and bad acquisitions have left a sour taste in the mouth of many on Wall Street. Cypress recently announced a $30 million sale of its Minnesota fab, which will be used to help deliver the balance sheet.
Merrill Lynch also sees the company as leading the USB-C market, which provides common interface for data, power, accessory and Ethernet. They see the mobile and PC industry to come on early and autos to follow.
Shareholders are paid a big 3.25% dividend. Merrill Lynch has a $16 price target. The consensus target is $13.71. Shares closed Thursday at $13.52.
These three stocks are more affordable and may have big upside for investors. While only suitable for more aggressive accounts, they all make sense in a sector that still has room to run.