A Wall Street firm on Wednesday downgraded several semiconductor stocks as the outlook for chip sales ebbs. But it sees chip design firms Cadence Design Systems and Synopsys holding up amid a possible industry downturn.
BofA Securities lowered its forecast for semiconductor sales growth to 9.5% this year from 13% previously. It sees semiconductor sales falling 1% in 2023, vs. its prior target for 7% growth.
"Semi downturns happen every 3-4 years, and we could be due for another one," BofA analyst Vivek Arya said in a note to clients. "Tighter global monetary policy, geopolitical turmoil and consumer weakness is likely to pressure second-half 2022 and 2023 chip demand."
On the plus side, constrained supply and pricing strength could help cushion a cyclical downturn in the semiconductor industry, Arya said.
Semiconductor Stocks Downgraded
Data center, cloud computing and automotive chip demand should help offset softening sales of smartphones and personal computers, he said.
Among semiconductor stocks, he downgraded wireless chipmakers Skyworks Solutions and Qorvo to underperform from neutral on the maturing 5G smartphone upgrade cycle. He also pointed to rising competition from Qualcomm.
Plus, Arya downgraded Texas Instruments to neutral from buy as TI increases its capital spending on new U.S. chip fabrication plants, commonly called fabs.
He rates Nvidia as his top pick in semiconductor stocks because of its exposure to cloud computing and artificial intelligence markets. In the same segment, he has buy ratings on Advanced Micro Devices, Broadcom and Marvell Technology.
He also likes semiconductor stocks that play in the automotive market, especially electric vehicles and advanced driver-assistance systems. Those stocks include Analog Devices, NXP Semiconductors and Onsemi.
Cadence, Synopsys Called Resilient
Meanwhile, Arya upgraded Cadence and Synopsys to neutral from underperform on their resiliency in the current market.
"We expect demand for chip design software/verification (electronic design automation or EDA) to grow unabated on secular growth in R&D intensity," he said.
Cadence and Synopsys are both on the IBD Tech Leaders list. Cadence stock has an IBD Composite Rating of 92 out of 99. Synopsys stock has a CR of 93.
IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
On the stock market today, Cadence stock rose 0.5% to 150.92 and Synopsys stock advanced 0.8% to 306.06. Both stocks are in consolidation patterns, according to IBD MarketSmith charts.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
