Semiconductor stocks have taken it on the chin this year, as the chip shortage continues and the broader technology sector struggles.
Concern about rising interest rates and the potential for recession also are hurting the sector, Bank of America analysts note. The PHLX Semiconductor Sector index has slid 25% so far this year.
So what can turn things around? Bank of America analysts offer four possibilities:
1) “An easing of China lockdowns, as they impact the real/perceived supply-demand situation,
2) “Affirmation of seasonal, third-quarter consumer personal computer and smartphone demand,
3) “Resilience in data center and enterprise demand (cloud capital expenditures and information technology budgets), and
4) “Recovery in growth/momentum leaders of prior years, including Nvidia (NVDA), Advanced Micro Devices (AMD), Marvell Technology (MRVL) and others.”
In addition, some investors may be waiting for bullish technical signals, such as the Semiconductor Sector index rebounding to its 50- and 200-day moving averages, the analysts said.
They presented their “favorite ideas exposed to resilient demand” in three semiconductor segments:
· Cloud computing: Nvidia, Advanced Micro Devices, Marvell Technology and Broadcom (AVGO).
· Cars: ON Semiconductor (ON), Analog Devices (ADI), NXP Semiconductors (NXPI).
· Capital expenditures: KLA (KLAC), GlobalFoundries (GFS), Applied Materials (AMAT), Lam Research (LRCX), Teradyne (TER).
Morningstar on Nvidia...
Morningstar analyst Abhinav Davuluri is bullish on the company, assigning it a wide moat. He puts fair value for the stock at $200, 13% above a recent quote of $177.
“Nvidia reported first-quarter results that came in ahead of our expectations. Gaming and data-center segments remained the primary growth drivers,” he wrote in a commentary.
“However, management noted second-quarter revenue will be negatively affected by $500 million to account for covid-19 lockdowns in China and the stopping of sales to Russia.”
Still, “despite near-term headwinds, we view Nvidia as our top fabless semiconductor pick, as we think the firm’s data-center business will prove resilient to macroeconomic headwinds,” Davuluri said.
...and on Applied Materials
He is bullish on this company, too, assigning it a wide moat. He puts fair value for the stock at $142, 26% above a recent quote of $113.
“Applied Materials reported fiscal-second-quarter revenue below the midpoint of management’s guidance and our expectations,” Davuluri wrote in a commentary.
“The primary culprit was covid-related shutdowns in China that delayed around $150 million of revenue in the quarter.”
To be sure, “since most of its peers’ quarters did not include April, we think Applied Materials' results appear worse, given [that] the shutdowns had the biggest impact during the final month of its fiscal quarter,” Davuluri said.
With “the firm’s backlog continuing to grow, we have confidence in sequential growth over the rest of the year as supply improves,” he said.
