NXP Semiconductors

This is considered a top play for investors looking for a chip stock with automotive and IoT exposure, and it is often rumored as a takeover target. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry.

It is also important to note that the combined company has become the number one supplier in auto semiconductors, number one supplier in global microcontrollers, as well as a dominant supplier in mobile payments.

NXP is getting its chips into high-growth areas such as contactless mobile payments, the IoT, mobile-phone charging, increased cellular data consumption and LED lighting. Deutsche Bank noted this in its report:

NXP highlighted its #1 position as the global automotive semi supplier, with leading positions in areas such as auto analog/RF/DSP, auto MCUs (ex Japan) and merchant auto MEMS sensors. Twelve of the company’s top 20 customers are automotive, with the end market representing ~41% of total revenues (ex Standard Products) in 2016.

The $110 Deutsche Bank price target compares with the consensus price objective of $108.65. The shares closed most recently at $107.04.

ON Semiconductor

This is a smaller cap play that aggressive accounts may want to examine. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits 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 integrated circuits both through organic growth and acquisitions.

The company 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:

We continue to view ON’s leadership position in Automotive Image Sensors 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, we continue to see structural upside for the shares.

The Deutsche Bank price target is $20. The consensus target is $18.02, and shares closed Monday at $15.32.

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These are four top semiconductor stocks in a subsector that has gigantic growth potential on its own, and when you add in the additional IoT possibilities and other industrial applications, there is tremendous upside potential. These stocks have all run, so it may make sense to buy partial positions now and see if we don’t sell-off some in the summer.