If any segment has had breathtaking returns over the past two years it has been the semiconductors. Investors who stayed long the red-hot companies focused on Internet of Things (IoT), industrial, gaming, data centers and more have had incredible returns. For now though, valuations are sky high, and as we saw recently, when the rotation sellers come in hard and heavy, it can turn ugly very fast. While the segment is far less cyclical than it was 20 years ago, as applications have increased in many different products and silos, there will always be some degree of cyclicality.
A new JPMorgan research report features the firm’s top large cap semiconductor picks for 2018. Given the lofty valuations in the sector, the firm looks to be playing 2018 a touch more conservatively, and the report noted this:
Based on the latest market data points and company presentations, demand trends appear stable and seasonal entering 2018 with the exception of memory that continues to trend above typical seasonality. We view stable demand trends that are broad-based and across most geographies.
The JPMorgan team is very bullish on four large cap companies for 2018, and all are rated Overweight.
This leader in semiconductors is working hard to scale away from dependence on personal computers, and the IoT is a big part of the shift. 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.
Intel raised its full-year outlook when it reported quarterly earnings that easily topped analysts’ expectations. The JPMorgan analysts are bullish on the prospects for 2018 and noted this:
We believe investors remain skeptical of Intel’s ‘Data-Centric’ businesses that account for ~45% of revenues vs. <40% three years ago with its Data Center Group (DCG) poised to grow by high-single digits % points over the next few years. Additionally, we anticipate Intel’s cloud hyperscale customers will continue to spend aggressively on cloud computing infrastructure over the next few years. We believe investors continue underestimating Intel’s adjacent technologies as well as Intel’s ability to deliver custom products continue to set a high barrier to entry for competitors. We expect Intel to drive gross and operating margins higher over the next few years as its customers continue purchasing premium products and as the company drives operating leverage through cost discipline.
Intel investors are paid a solid 2.52% dividend. The JPMorgan price target for the stock is $53. The Wall Street consensus price objective is$46.84, and shares traded early Friday at $43.40.
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.
Earlier this fall the company offered a massive secondary offering that was used to retire a stunning $2.25 billion in outstanding debt. That combined with continued demand for memory makes the stock a top pick at JPMorgan, which said:
Supply-side fundamentals in memory markets remain constructive and we expect industry participants to focus on sustaining strong profitability with capex primarily for technology transitions rather than for capacity expansion. We believe memory demand drivers are underappreciated with solid demand from end-markets such as data center, AI, Deep Learning, “Big Data”, Mobile and Autonomous Driving. Micron continues executing well on its manufacturing roadmap and we expect the team to drive gross and operating margins higher in 2018 even if prices return to more typical deflationary environment.
JPMorgan has a $55 price target, while the consensus price target is $53.86. Shares traded at $42.30 Friday morning.