If it were not for the U.S.-China trade war escalating and then de-escalating throughout the last year, semiconductor stocks would trend higher. Instead, the sector is struggling to hold a trading range that started early this summer. The outlook weakened after various chip companies warned that the second half would come in weaker than expected. Investors need to decide if the strength in chip sales earlier this year was due to customers hoarding supply ahead of tariffs. Or will the refresh in smartphones, led by Samsung (SSNGY), Apple (AAPL), Huawei and others, give a lift in demand?
The uncertainties in chip sales through the rest of the year are already adding volatility to semiconductor stocks. Already trading at low price-to-earnings multiples, value investors seeking growth in the chip sector have several companies to pick from. And since chip stocks may enjoy strong profit growth when demand rebounds, they do not need to pay investors a dividend. Instead, they may grow cash levels and increase capital expenditures when the market improves.
There are seven semiconductor stocks that investors should consider buying now at current levels.
Micron stock fell from $50 to the low $40s after the company released fourth-quarter results that beat consensus estimates. Investors fretted over the significantly weaker NAND outlook. Bit growth — one way to represent the projected increased in demand — will slow in 2020 due to excess supply. Still, for 2019, DRAM supply growth is trailing demand while cost reductions for the fiscal year are moderating. This suggests a demand-supply equilibrium for both NAND and DRAM. Plus, Micron is not slowing down on product innovation.
Micron shipped the first 1z-nanometer products, giving it feature size leadership. 75% of its production was 1x while 1Y output will increase. Its 96-layer 3D NAND is becoming a bigger portion of its mix, which should lift profit margins. It is also using replacement gate dyes for the first time, which reduces the replacement gate transition.
Near-term worries over excess supply conditions could pull MU stock to below $40 for an extended period. But the market demand for its product will only grow in the coming years. Consumer solid-state drives are now mainstream for computers. Non-volatile memory express — an interface protocol built for SSDs — will lift Micron’s market share. In mobile, NAND shipments tripled year-over-year. As 5G rolls out, LP5 DRAM demand will increase. Data center and graphics are a strong market and Micron is at the heart of the business. And in automotive, weak sales will not hurt revenues from this segment. Auto companies are adding more computer components, which will lift demand.
Nvidia is well above the $135 lows set in June 2019. Investors continued to accumulate Nvidia stock after its second-quarter report posted on Aug. 15. Chief among its growth segments is its dominance in the GPU market for PCs. Gaming companies continue to support the company’s RTX platform. In Q2, a growing number of AAA titles announced support for RTX, including Activision Blizzard’s (ATVI) Call of Duty, Cyberpunk 777, Watchdogs: Legion and Wolfenstein: Youngblood.
With RTX cards’ inclusion in hundreds of original-equipment-manufacturer laptops will give the GPU segment a strong lift in revenue. Nvidia’s solution offers energy efficiency through the Turing architecture and Max-Q technology enables a thin and light form factor.
Nvidia reported a 30% jump in the automotive segment, to $209 million. Adoption of its artificial intelligence cockpit solutions plus autonomous driving projects will lead to the sustained growth the company enjoys. Volvo (VLVLY), Daimler’s (DMLRY) Mercedes-Benz models and Toyota (TM) are all employing the end-to-end platform.
The gaming market will continue to add meaningfully to results. RTX-enabled games continue to grow — and more will come. Although game sales weakened, game developments and better pricing will lead to higher sales. And that will result in avid gamers upgrading their GPUs to support those titles.
Advanced Micro Devices
Advanced Micro Devices earned Microsoft’s (MSFT) vote of confidence after Microsoft chose it to power the Surface Laptop 3. Although this will not add meaningfully to AMD’s revenue, it does set a framework for PC manufacturers to follow. AMD’s mobile Ryzen offers powerful computing, graphics computing and a great battery life. All of this is wrapped in an ultra-slim form factor. On the gaming front, AMD announced the Radeon RX 5500 to compete against Nvidia’s mainstream GTX graphics cards. The refresh replaces the RX 570 and RX 580 GPUs which have been on the market for three years. AMD stock did not move after the announcement because markets are still waiting for a high-end competitor to Nvidia. AMD launched a 7-nanometer RDNA graphics card lineup but gave no hint on when the second-generation version will come. As long as AMD does not lose market share to Nvidia, it should still make decent profits from the GPU market.
AMD’s new generation of server processors will accelerate its market share growth. It has two chips planned: Epyc Milan and Epyc Genoa. Genoa will target the server and data center markets and will be on the SP5 platform. The company also shared some details on the Zen 3 and Zen 4 architecture. Zen 4 will come in a year and might come on the new 5-nanometer or 6-nanometer process. At this pace, AMD will have a significant lead over the competition.
Broadcom issued a conservative outlook and tone in its third-quarter earnings call. The company said that infrastructure software customer demand remains stable, especially in North America and Western Europe. While semiconductor solution revenue fell 5% year-over-year to $4.4 billion, it rose 6% quarter-over-quarter. Even though the U.S.-China trade conflict lingered in the period, Broadcom did not see the business deteriorate further. This gave management the confidence to forecast $22.5 billion in revenue in fiscal 2019. $17.5 billion will come from semiconductor solutions.
Broadcom’s semiconductor business is fundamentally strong. Since it is in the business of building connectivity solutions from CPUs to memory in data centers, higher bandwidth demand will drive its growth. With the semiconductor solutions segment representing 79% of its total revenue, the business may rebound from here. That is, if the sector is at a bottom, a ramp-up in orders from North American customers will lead to a rebound in AVGO stock.
Its constant commitment to research and development will result in the development of new semiconductor technology. For example, expect higher demand for better performance in connectivity, through increased bandwidth. And as applications transition, it will increase the demand for Broadcom’s semiconductor products.
Despite a weak quarterly report that sent the stock to below $45, Intel traded recently at close to $50. Investors forgave the company for the recent business slowdown because Intel stock trades at an inexpensive P/E of 11.8. It also pays a modest dividend that yields 2.5%. What might investors look forward to as Intel faces heavy competition from AMD?
Intel has a roadmap of products. Its Cascade Lake processor is on 14-nanometer technology. Even though it is behind AMD’s 7-nanometer processor, Cascade Lake has useful features that will appeal to customers. Deep-learning boost technology is inference technology built into the CPU. Optane persistent memory may attract over $10 billion worth of business from the data center market. Optane has a new memory controller on its CPU and supports massive memory sizes, such as 128 gigabyte and 512 gigabyte densities.
In the first half of 2020, it will launch the Cooper Lake CPU, followed by Ice Lake in the second half of 2020. Getting two CPU platforms out in a single year is a new approach for Intel. But this cannot come soon enough. These CPUs will be on 10-nanometer processors and already show the promise of high yields. In the short term, investors need to patiently wait for updates on the development of Optane. Intel is in the R&D investing phase but ramping up this business will happen later.
In the short-term, the NXP Semiconductors stock price depends on the market’s sentiment. But in the long term, as management earns investor confidence in its ability to drive growth, the stock will rise. The supplier of secure connection chips already rose from around $90 in June to above $110, thanks to its strong second-quarter earnings report.
NXP has four major end markets for growth. In automotive, advanced driver-assistance systems and electrification will increase chip sales. More OEM car manufacturers seek solution innovations. And as cars add more technology content, NXP stands to benefit from this trend. In the industrial and internet of things segment, the company faces a fragmented customer base. Processing needs are transforming the market, so NXP stands out because it offers scalable solutions.
Mobile is still a growing market. And even though sales for high-end smartphones are slowing, phone makers continue to demand features. In driving more innovation, NXP management expects continued growth from this market.
Communication infrastructure is a clear growth driver. While the uptake for 5G will trickle in the near term, the shift to the faster network cannot be stopped. The U.S. telecom market is already investing in the change but is rolling it out one city at a time. But once any issues are worked out, 5G implementations will lift NXP’s growth. At a forward P/E of under 13, NXPI stock is inexpensive.
Qualcomm tried but failed to break out above $80 throughout 2019. At a recent price of around $77.50, the stock offers a dividend that yields 3.2%. The stock’s upside is getting held back on government scrutiny over its alleged monopoly practices.
Qualcomm is expanding its reach beyond smartphone devices and is getting into the laptop market in a big way. Microsoft said that the Surface Pro X will offer an all-day battery life. This feat is due to the 13-inch unit having a Qualcomm Snapdragon 8cx processor called SQ1. Microsoft also boasts that this is the thinnest Surface device ever. In effect, SQ1 ushers in a new era in mobile tablet and laptop computing. Qualcomm also competes with SoftBank’s (SFTBY) Arm Holdings with the SQ1. Still, it does not compete with AMD’s mobile solution since customers may opt for a Surface 3 laptop if they want an AMD-powered system.
For the upcoming third quarter, Qualcomm expects revenue in the range of $9.2 billion to $10.2 billion. GAAP diluted earnings per share will be $3.57-$3.77. At 18.5 times forward P/E, investors should consider Qualcomm stock.
As of this writing, Chris Lau owned shares of NXPI.