After two years of incredible growth and returns for the semiconductor industries, even the most bullish of the analysts on Wall Street are becoming more cautious on the segment for 2018, and with good reason. The PHLX Semiconductor Sector (SOX) index was up a staggering 38.3% in 2017, and that followed a massive double-digit rise in 2016. While demand will continue, and the cyclicality that was once inherent has tapered over the years, the bottom line is that the stocks are expensive.
A new research report from the analysts at SunTrust Robinson Humphrey notes that 2017 was indeed an awesome year and that fourth-quarter earnings should reflect 17% industry growth, which is the first double-digit growth year since 2010. However, the firm is tapping the brakes on 2018, and this here’s why:
Despite a strong structural backdrop (the industrialization of semis) and benign (or perhaps better) demand trends today, we believe several factors will challenge a coordinated outperformance of semi fundamentals and stocks in 2018. We cannot forget that the industry posted negative growth in 6 out of the last 17 years, and was shrinking as recently as mid-2015 to mid-2016, despite global GDP growth of ~2.9% during that time.
The analysts are still positive on five top companies, two of which are favorites, and all still make good additions to aggressive growth portfolios.
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.
Last year the company introduced a highly integrated polyphase analog front end (AFE) 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 Linear Technology acquisition, which closed earlier this year, is a huge positive. In addition, many on Wall Street expect that corporate management ultimately will exceed its $150 million of targeted synergies.
Analog Devices investors receive a 2.11% dividend. The SunTrust price target on the shares is $105. The Wall Street consensus target is $98.25. The stock closed last Friday at $91.67.
This company has been on fire over the past year and remains a top pick at SunTrust and across Wall Street. 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.
Broadcom has big exposure to the cloud through its Enterprise Storage segment (HDD controllers) and general data center build-outs in its Wired Infrastructure segment. Within HDDs, enterprise units are 15% to 20% of the business on a unit basis and 20% to 30% on a revenue/profit basis.
Broadcom investors are paid a 2.57% dividend. SunTrust has a $300 price target, and the consensus target is $315.69. Shares closed Friday at $271.62.