After two years of incredible performance, the chip industry and some of the high-flying stocks have hit a road bump, one that first knocked some of the wheels off back in early February. The bottom line for the sector is that capital expenditures at cloud service providers were up a stunning 65% year over year in the first quarter and increased 2% quarter over quarter, which is rare as seasonally the first quarter is typically down.
With Nvidia Corp. (NASDAQ: NVDA) set to report results on Thursday, May 10, Wall Street is anxiously awaiting those results, and with good reason. Many top analysts feel that there continues to be an opportunity for increasing average selling prices and continued mix-shift to IT hardware spend, including server CPUs and increased storage spending, as cloud data growth continues to outpace the overall market. All of this could be positive for the top chip companies.
We screened the Merrill Lynch semiconductor research universe looking for stocks rated Buy with substantial upside potential to the analysts’ assigned price targets and found three, along with Nvidia, that could explode if the company posts a big earnings print on Thursday.
Advanced Micro Devices
After years of frustrating performance, Advanced Micro Devices Inc. (NYSE: AMD) appears to have turned the corner and is a hot commodity on Wall Street. 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.
Last year the company released its first major offering in five years, the Ryzen chipset, which many feel is 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 company posted huge results, and the analysts said this at the time:
First quarter sales and earnings per share of $1.65 billion and $0.11 were 5% and 17% ahead of expectations owing to strength in new accretive products (Ryzen, EPYC, and Vega), which drove gross margins 30 basis points ahead of estimates. AMD’s second quarter sales and earnings per share outlook was also ahead by 9%/ and 30% on continued strength particularly in Ryzen and EPYC, which are expected to drive a gross margins of 37% almost 1% ahead of the Street.
The Merrill Lynch price target for the shares is $15, which compares with the Wall Street consensus price objective of $14.86. The shares closed Tuesday at $11.61 apiece.
Broadcom
This stock has been on fire over the past year and remains a top pick 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, and while the company was blocked in its attempt to buy Qualcomm, new chip designs are expected to drive future growth.
Broadcom investors are paid a 2.93% dividend. Merrill Lynch has a price target of $285, while the posted consensus target was last seen at $321.50. The stock closed most recently at $238.85 per share.
Intel
This leader in semiconductors is grabbing big Internet of Things and data center cloud spending. 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.
The company’s share of total business with Apple is expected to be an estimated 5% of revenue for calendar 2018. That figure may be growing, and top analysts estimate that Apple was 3% of sales for Intel, excluding CPU revenues, in 2016, with an estimated 40% or so allocation for baseband processors. It is now thought this allocation likely expanded to about 60% in the latest generation iPhones, and note that recent press reports have this figure as high as 70% in 2018 and 100% in 2019.
Intel investors are paid a solid 2.24% dividend. The $70 Merrill Lynch price target is well above the consensus price objective of $60.25. The shares closed Tuesday’s trading at $53.63.
24/7 Wall St.Nvidia
This top chip stock has reported strong earnings but was absolutely hammered last month and has rebounded in front of Thursday’s earnings. It is also on the Merrill Lynch US 1 list. Nvidia 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.
The company is also moving into visual computing chips for cars, mobile devices and supercomputers. Nvidia 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.
The Merrill Lynch analysts are bullish in front of the report and said this:
We reiterate Buy, top sector pick ahead of the first quarter report on Thursday, cloud strength offsets crypto volatility, watch for sell-in accounting charge. First quarter: Data center focus, sell-side $679 million, buyside $700 million, gross margins 63%, for second quarter: sales 2% quarter over quarter with crypto impact contained. Buy ahead of new Volta gaming cycle in the second half, plus continued AI inference wins, NVIDIA key beneficiary of surging cloud capex.
Nvidia investors are paid a small 0.24% dividend. The Merrill Lynch target price is $300. The consensus price target is much lower at $249.58, while the shares closed most recently at $250.40.
The market and demand for chips are not going away. The rapid growth may slow, so it makes sense to stick with companies that are involved in the business of tomorrow, rather than a commodity type businesse that can stress average selling prices.
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