If you were long the semiconductors at the start of October, probably the last thing you want to do is buy into or even think about the industry now. However, the bottom line for aggressive accounts is these stocks have been hit so hard that multiples and valuations have been knocked to the lowest levels in some time, and the industry could provide a solid Santa Claus rally trade.
In a new research report, Jefferies makes the case that the “Tectonic Shift” for semiconductors is still in place and some of the more cyclical drivers may be less of a factor than in the past. The report noted this:
P/E multiples have compressed since 2016 and semis currently trade at a 30% discount to the S&P 500 – we think more cuts are baked into stocks than will be realized. We think there is a secular upward bias to semiconductor margins, driven by consolidation which is leading to: 1) better pricing power over customers, 2) pricing power over suppliers, 3) leverage on operating expenses, 4) improving mix away from consumer and handset and towards a more highly fragmented customer base in the industrial, auto and Internet of things markets.
The firm remains very positive on these five companies, all of which are rated Buy.
Advanced Micro Devices
After years of frustrating performance, this top company appeared to have turned the corner, but it was absolutely destroyed in October and November. 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.
While third-quarter earnings were somewhat disappointing, new catalysts could drive the shares, with AMD having a generational share gain opportunity. EPYC 2/Rome can leverage the software and qualification work started with EPYC 1, and most expect Rome to ramp in the second half of 2019. The new Vega GPU will be industry’s first at nanometers, and AMD is already annualizing more than $100 million in data center GPU sales, addressing a $10 billion potential opportunity.
The Jefferies price target for the shares is $30, which compares with a much lower Wall Street consensus target of $24.17. The stock closed trading on Monday at $20.08 a share.
This stock has been crushed as well and is a top value play at Jefferies. 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 in 2019.
Broadcom investors are paid a 2.97% dividend. Jefferies has a $278 price target, but the posted consensus target is $288.74. The shares closed at $235.31 on Monday.
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