The U.S. trade war with China has hit semiconductor stock investors especially hard. Many American chipmakers rely heavily on the Chinese market, and the trade war has created uncertainty on their near term outlook. To make matters worse, a cyclical downturn in the memory market has pressured pricing and demand. However, secular growth trends in automation, cloud computing artificial intelligence and other cutting edge technology fields have a handful of the best semiconductor stocks well-positioned for long term growth once the trade war eventually dies down. Here are eight of the best semiconductor stocks to buy, according to Morningstar.
Infineon (IFNNY) is a top chip supplier to the automotive, power and smart card markets. Analyst Brian Colello says Infineon is navigating near term headwinds in the auto market and has significant exposure to long term growth areas including electric vehicles, advanced powertrain systems and power conservation. Its roughly $10 billion buyout of Cypress Semiconductor (CY) announced in July should create nearly $200 million in annual cost synergies. Colello says Infineon shares are undervalued and the stock is one of Morningstar’s best ideas in the tech sector. Morningstar has a “buy” rating and a $25 fair value estimate for IFNNY stock.
Intel (INTC) has certainly struggled to deploy its 10-nanometer process technology. However, while it may have lost a bit of market share, analyst Abhinav Davuluri says Intel still has about 86% share of the PC and server CPU markets, and it is well-positioned to earn excess returns on invested capital over the next two decades. Intel will begin shipping its Ice Lake chips for laptops in the second half of 2019 and will ramp its 10-nm server parts in 2020, Davuluri says. Morningstar has a “buy” rating and a $65 fair value estimate for INTC stock.
Microchip Technology (MCHP) is a global supplier of microcontrollers, chips that act as the brains of a wide range of products such as garage door openers and electric razors. Collelo says Microchip’s management team is among the best in the industry, and the company has made the wise choice to focus its business on high margin end markets. Collelo says Microchip’s MCUs will be in high demand as the world becomes more connected and “smarter” coming decades, and management says sales have bottomed in the near term. Morningstar has a “buy” rating and $112 fair value estimate for MCHP stock.
NXP Semiconductors (NXPI) is the largest supplier of chips to the automotive industry. Analyst Seth Sherwood says NXP semiconductor stock should benefit from secular trends such as increasing industrial connectivity, efficiency and safety. In addition, he says 5G network rollouts, the Internet of Things and more advanced driver assistance systems should serve as tailwinds for NXP demand. Weak auto markets in Europe and China dragged down NXP’s revenue by 3% in the second quarter, but Sherwood says long term growth trends remain in place. Morningstar has a “buy” rating and a $115 fair value estimate for NXP semiconductor stock.
ON Semiconductor Corp.
ON Semiconductor (ON) is a chip supplier for the auto and industrial markets, particularly the power market. Sherwood says ON has a relatively narrow portfolio of products, but it should still benefit from secular growth in advanced driver assist systems, vehicle electrification, autonomous vehicles and industrial connectivity. ON blamed an inventory correction and weakness in China for its lackluster guidance, and its shares are down more than 10% in the past year. Sherwood says long term investors should be scooping up the stock on the dip. Morningstar has a “buy” rating and a $26 fair value estimate for ON Semiconductor stock.
Qorvo (QRVO) produces radio frequency chips for smartphone makers and industrial and defense customers. Collelo says the rollout of 5G mobile networks will create a major demand for Qorvo’s RF expertise, and the company already generates 70% of its revenue from mobile devices. The company’s high exposure to the Apple (AAPL) iPhone creates a risk of losing content share in future models, but Collelo says Qorvo is one of the few true global scale RF product producers. Qorvo has heavy exposure to Huawei, creating significant trade war uncertainty. Morningstar has a “buy” rating and $86 fair value estimate for QRVO stock.
STMicroelectronics (STM) is the largest semiconductor producer in Europe, and Collelo says its extremely diversified product portfolio helps reduce risk in a cyclically weak market. Collelo says STMicro has improved its product mix and boosted its margins, and the company has significant growth opportunities in microcontrollers, sensors and auto industry products. Recent key design wins with Apple and Tesla (TSLA) are bullish for the company, and more connectivity in cars and industrial equipment should continue to drive demand for STMicro chips in the long term. Morningstar has a “buy” rating and a $22 fair value estimate for STM stock.
Skyworks (SWKS) is a top radio frequency component supplier for Apple and other electronic device makers. Apple accounted for nearly half – 48% – of Skyworks’ 2018 revenue. Collelo says Skyworks should see major demand from 5G iPhones and other devices, but the company’s 12% revenue exposure to Huawei and intense competition from Qualcomm (QCOM) are near term headwinds. However, with the stock down 17% in the past year and trading at 12.1 times forward earnings, Collelo says long term investors should consider Skyworks shares significantly undervalued. Morningstar has a “buy” rating and a $95 price target for SWKS stock.
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