For the past couple of years, owning the chip stocks has been an easy ride for aggressive growth investors. Exponential growth in all areas where semiconductors are used seemingly happened every quarter, and the sector outperformed in a big way. However, semiconductors are also highly cyclical, with many of the top companies nearing a five-year forward price-to-earnings full valuation.
Like many of the top companies we cover at 24/7 Wall St. Stifel is extremely cautious in their sector coverage, but with that in mind, the analysts also see tremendous growth ahead for semiconductors in certain areas. They noted this in a recent research report:
We believe there are many names in our coverage universe that are benefiting from secular changes and trading at a discount due to broad cyclical and tariff concerns. Some of these secular changes include: Cloud data centers, Artificial Intelligence, slowing of Moore’s Law (price/transistor is increasing), Automobile Electrification/Autonomy, and Edge Computing. Coming into this earnings season we recommend names that have high exposure to these secular changes.
Three stocks are highlighted and have Buy ratings, and they may be good choices before third-quarter numbers are reported. It is important to remember these are only suitable for very aggressive accounts with high risk tolerance. Missing estimates or poor guidance could be very harmful.
Advanced Micro Devices
This top company turned the corner big time in 2018 and has been a hot commodity on Wall Street. 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.
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 said this about the company:
While we believe the Intel shortage may provide some opportunity for AMD to increase its personal computer market share in the fourth quarter of 2018, we expect AMD to maintain its long-term strategy and focus on delivering competitive processors for the high-end of the market rather than seeking short term opportunities for entry level devices. We remain focused on data center penetration and expanding gross margins as the catalysts for the AMD shares rather than increasing PC market share. In our view, the primary risk from the shortage is likely to impact other PC component suppliers.
The $38 Stifel price target for the shares is among the highest on Wall Street. The posted consensus target price is $25.67 a share. The shares closed Friday’s trading at $26.34 apiece.