Merrill Lynch Still Sees Massive Opportunities for 5 Top Semiconductor Stocks

July 7, 2017 by Lee Jackson

If any sector has become volatile, it’s technology. Given the first-half success for some of the top stocks, especially the vaunted FANG group, it’s not surprising. Nervous investors have a pretty itchy trigger finger when it comes to taking profit, as many of biggest companies in tech have run very hard over the past year. The good news for those looking to be or stay involved in the sector is that many of the stocks remain underowned by institutional accounts.

In a new Merrill Lynch research report, the firm’s outstanding semiconductor analyst Vivek Arya makes the case that he sees very positive opportunities at five top semiconductor companies the firm covers. The report cites a combination of upcoming catalysts and underownership by portfolio managers. All five stocks are rated Buy at Merrill Lynch.

Broadcom

This stock has been on fire over the past 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.

The analysts note that the stock is underowned compared to peers, and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which they feel is accretive, are very positive catalysts. They also feel dividend growth is possible.

Broadcom investors are paid a 1.3% dividend. Merrill Lynch has a $260 price target for the shares. The Wall Street consensus price target is higher at $273.50. Shares closed Thursday at $235.04 apiece.

Analog Devices

This stock spiked recently and has come back into a good buy range. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

The company recently introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the company is still somewhat underowned and recent worries over iPhone content loss is more than factored into the stock’s current price. Trading at a reasonable 15 times earnings with $5 earnings per share potential, the shares are cheap to historical price-to-earnings levels.

Analog Devices investors are paid a solid 2.32% dividend. Merrill Lynch has a $92 price target. The consensus target is $94.10, and the stock closed Thursday at $77.33 a share.

AMD

After years of frustrating performance, this company appears to have turned the corner and is a hot commodity on Wall Street, despite a recent earnings hiccup. 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.

Plus, AMD is held by just 1.8% of active managers, which is way below the historical 10% ownership level at a relatively equal weight position.

The Merrill Lynch price target for the stock is $16.50, and the posted consensus target is $12.82. The shares closed on Thursday at $13.02.

Microchip Technology

Microchip Technology Inc. (NASDAQ: MCHP) not only is a huge Internet of Things benefactor, but a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide.

The company offers microcontrollers, such as 8-bit, 16-bit and 32-bit microcontrollers under the PIC brand name and 16-bit dsPIC digital signal controllers, as well as provides microcontrollers for automotive networking, computing, lighting, power supplies, wireless communication and wireless audio applications.

Microchip Technology is only owned by 6% of active portfolio managers, which is well below the 2011 peak of 12%.

Microchip investors receive a very solid 1.92% dividend. The $95 Merrill Lynch price target compares with the consensus price objective of $93.65. The share price on Thursday’s close was $77.12.

NVIDIA

This top chip stock has reported very strong earnings, and it was the top performing stock in the S&P 500 last year. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.

NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Jefferies sees the stock continuing to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units (GPUs) in the cloud.

Merrill Lynch gives the company a premium multiple due to the projected long-term earnings growth rate, and the firm also sees the dividend growing 16.4% over the next three years. While 17.5% of managers own the shares, that is well below the 35% “red line” ownership level and the 40% to 50% ownership of large-cap tech growth peers.

NVIDIA investors are paid a 0.4% dividend. Merrill Lynch has set its price target at $185, well above the posted consensus target of $133.89. The shares closed Thursday at $143.48.

These five top companies all have a big hand in the growing IoT sphere, and their stocks also are underowned, compared to historical levels, by portfolio managers. Given the big run in some these stocks, investors may want to buy partial positions now and see how second-quarter earnings shake out.

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