The benchmark PHLX Index (SOX) started the week at 3,452, up 2% over the prior volatile and holiday-shortened week. The SOX is making up ground on a year-to-date basis, down 12.5% this week versus 14.44 % last week.
Semiconductors investors have largely spent their research time last week studying the impact of Russia’s invasion of Ukraine on the chip sector. One week into the conflict, the effects aren't clear.
Prior to the invasion, Michael Every, an analyst at Rabobank, a Dutch-based multinational, said the impact of war in Eastern Europe would have a significant impact on chipmakers and on many technology products.
“Manufacturing supply chains would be impacted by a conflict or sanctions against Russia,” Every said. “Russia’s share of global nickel exports is estimated to be about 49%, palladium 42%, aluminum 26%, platinum 13%, steel 7% and copper 4%. “That immediately removes half of all global nickel exports for kitchenware, mobile phones, medical equipment, transport, buildings, and power; palladium for catalytic converters, electrodes, and electronics; and a quarter of aluminum for vehicles, construction, machinery, and packaging and would result in huge upside pressure on prices.”
However, according to a dispatch from Reuters, chip industry experts say they expected “limited supply chain disruption for now from the Russia-Ukraine conflict, thanks to raw material stockpiling and diversified procurement.” Clouding the picture is the ongoing global semiconductor shortage over the last year, as chip makers grapple with the economic ramifications of the COVID pandemic and resulting government shutdowns.
A specific problem right now is that Ukraine provides about 90% of U.S. semiconductor-grade neon, which chip manufacturers need to produce semiconductors. “The gas, a byproduct of Russian steel manufacturing, is purified in Ukraine, market research firm Techcet says,” Reuters reported. “Russia is the source of 35% of the palladium used in the United States. The metal is used in sensors and memory, among other applications.”
With the semiconductor outlook increasingly uncertain right now, TheStreet’s experts are reviewing these industry stocks this week.
Advanced Micro Devices (AMD) $121. 5-day performance - 6.35%.
TheStreet’s Timothy Collins likes Advanced Micro Devices (AMD) as a range bound play over the next few weeks.
“AMD’s board recently approved a new $8 billion repurchase agreement,” Collins said. “If the market moves higher from here, I doubt they will get aggressive with a buy back immediately. However, if we reverse lower, I wouldn't be surprised to see AMD scoop up some of its own shares.”
Looking at the daily charts, Collins sees resistance in the $127.50 to $132.50 range from where the shares currently trade.
“The 50-day simple moving average (SMA) resides at $128.50,” he noted. “This sits within the resistance range but on the lower end. Support should be found around $110 with a secondary level at $105. I see $105 as the level we would move to if $110 fails, but I anticipate buyers or the company would step in around that level.”
Secondary indicators are also bullish, which shouldn’t be a surprise given the strong bounce over the past few days.
“AMD stock is hovering just above the 21-day SMA right now,” Collins said. “This sets up well for an iron condor trade (i.e., an options strategy consisting of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with the same expiration date). That trade offers a measured level of risk and reward, but is best executed within the next three weeks.
According to Collins, here’s the trade on AMD:
--- Sell to open March 18, 2022, $107 - $100 put spread at $1.05
--- Sell to open March 18, 2022, $128 - $135 call spread at $1.50
--- Net Credit: $2.65
--- Max Risk: $435
--- Max Reward: $265
--- Days until expiration: 21
--- Breakeven: $104.35 and $130.65
Qualcomm (QCOM). $171. 5-day performance 1.96%.
Global pandemics and European land wars aren’t the only topics on the table with semiconductor tables this week. Ongoing technology trends matter, too.
Chistiano Amon, president and CEO of Qualcomm (QCOM), told Jim Cramer on a recent episode of the Mad Money TV show how the market for chips is expanding as the Internet of Things (IoT) opens up new opportunities. The company recently delivered a 22-cents-a-share earnings beat on a 30% rise in revenues.
“Amon said Qualcomm is now about a lot more than just 5G and mobile handsets,” TheStreet’s Frank Hartzell reported. “The company has a diversified portfolio of products, including automotive, where partners like General Motors GM are helping to bring assisted and autonomous driving features into reality.”
When asked by Cramer where the auto industry is headed, Amon explained that assisted driving features will likely come to every vehicle in the future to make them safer and more enjoyable to drive. Fully autonomous vehicles will arrive in time, but it may take longer than more people expect to get there, he said.
Amon was also bullish on Qualcomm's growing IoT business, which now includes everything from robotics to smart power meters to retail tracking systems. Qualcomm has powerful ecosystems for both hardware and software in all of these areas, he said.
Qualcomm was also one of three chip-related companies identified by Real Money's Bob Ciura as having outsized growth opportunities.
"Qualcomm has managed to boost its dividend for 19 consecutive years, which puts it in rarified company for a technology outfit, particularly one that is focused on semiconductors," Ciura wrote recently on Real Money. "Qualcomm's 1.6% dividend yield also puts it ahead of the broader market, so in concert with its earnings growth and dividend growth potential, it looks quite attractive."
TheStreet’s analysts see earnings growth of 7% annually in the years to come as Qualcomm continues to take advantage of its competitive positioning in the wireless sector in particular. “Qualcomm's 1.6% dividend yield also puts it ahead of the broader market,” Ciura said.
Intel $47.65, 5-day performance 5.96%;
Texas Instruments $171. 5-day performance 2.45%.
RealMoney’s Ciura believes the semiconductor sector offers a “huge potential growth runway,” with industry stocks having the ability to grow meaningfully whether they take market share or not.
He believes Qualcomm (see above), Intel (INTC) and Texas Instruments (TXN) all have strong long-term growth potential, in addition to offering market-beating yields.
“Intel's dividend streak stands at eight years, as the company skipped a year following the financial crisis in raising its payout,” Ciura noted. “Importantly, Intel didn't cut its dividend; it just failed to raise it. At the time, the company was struggling to grow and was highly leveraged, so management focused on reducing that leverage rather than boosting the dividend. We believe that was the correct decision for the long-term health of the company.”
The payout ratio is 39% for this year, so like Qualcomm, Intel's dividend safety should be outstanding, even in the face of a recession.
Ciura sees 5% earnings growth annually in the years ahead, which would be due to Intel’s legacy segments -- such as memory and storage -- somewhat offsetting higher growth areas such as Mobileye. “That should provide enough cash to see many years of dividend increases ahead, in line with the company's 5% average increase in the past decade,” he said.
Intel also offers a very strong dividend yield that is “high in absolute terms, but very high when considering Intel is a technology stock,” Ciura added.
Texas Instruments stands as one of the oldest companies in the technology sector, having been founded in 1930. The company generates about $20 billion in annual revenue, and following months of weakness in the share price, trades for a market cap of $153 billion.
“Texas Instruments sports an 18-year dividend increase streak, which again is quite long for a technology company, as they tend to focus spending more on growth than dividends,” Ciura noted. “Even so, the company's payout ratio is 50% for this year.”
The payout ratio was much lower in years past, but Texas Instruments has averaged 20% dividend increases in the past decade, an extremely impressive growth rate. “We don't expect that sort of growth to be sustainable, but it verifies management's commitment to Texas Instruments being a strong income stock,” Ciura said.
Going forward, Ciura sees 7.5% average earnings-per-share growth in the years to come, providing the company the ability to raise the dividend by the same rate without undue stress on the payout ratio.
“In addition, the yield of 2.8% is more than double that of the S&P 500, so Texas Instruments is a true income stock with growth potential,” Ciura noted.
