Stifel Says Semiconductor Trade Not Over: 4 to Buy Now

For the past few years, the semiconductor industries have been red hot and the top stocks were all but unstoppable. But this earnings season showed some weakness in some company’s reports, and some on Wall Street are saying the cycle for the very cyclical sector has peaked. Noting lower cryptocurrency demand among other issues, the sector has buckled some recently.

One firm that remains positive on select companies is Stifel, which makes the case that the future for some of the top stocks in the sector remains bright.

The firm noted this in the report:

We prefer investing based on secular changes in the market rather than trying to predict ‘where are we in cycle?’. Thematic secular changes we have been emphasizing are: the increasing importance of memory to system performance; distributed processing in data centers or offloading workloads from CPU; and intelligence at the network edge. In our view, the past quarter’s earnings results and share price reaction clearly indicates that investors’ concerns over a cyclical peak to semiconductor shares are ruling the Semiconductor index of SOX negativity. Following our many recent meetings with institutional investors, the overriding concern is that the semiconductor business has to be at a peak. It’s been too good for too long. We continue to believe the many secular industry changes have disrupted semiconductor cycles.

Four top stocks are rated Buy at Stifel, and all still look like solid choices for more aggressive growth accounts.

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 Stifel team noted this in the recent report:

We believe some investors were concerned on the impact of lower cryptocurrency demand on GPU sales, and according to the company, blockchain accounted for ~6% of total revenue, down from ~10% the previous quarter. More importantly, in our view, the company’s non GAAP gross margins of 37.1% was up 3.5% year-over-year and the company gave guidance for non-GAAP gross margins to expand to ~38% in in fiscal third quarter 2018. The company believes it is on track for mid-single digit server CPU market share exiting 2018 and is sampling its 7 nanometer second generation EPYC chips.

The Stifel price target for the shares is $21, and the Wall Street consensus price objective was last seen at $17.96. The stock closed Friday’s trading at $19.77 a share.

Micron Technology

This is a global leader in advanced semiconductor systems. Micron Technology Inc.’s (NASDAQ: MU) 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.

The company posted outstanding quarterly earnings recently and also provided forward guidance that exceeded Wall Street estimates. With memory demand drivers remaining somewhat underappreciated and with solid demand from end-markets such as data center, artificial intelligence (AI), deep learning, big data, mobile and autonomous driving, Micron continues to execute well on its manufacturing roadmap.

Stifel has a stunning $108 price target, while the posted consensus target is $83.60. Shares closed most recently at $47.11 apiece.