The last 18 months have been hard on the semiconductor industry. Investors sold off chip stocks through the second half of 2018, but a year later the sector is looking better. The turndown was prompted by the US-China trade tensions. That 'trade war' is still simmering, but the two governments are continuing to talk. Investors are less nervous, now that the pattern of tariff-reprisal-delay-negotiate is understood and baked into the affected industries.
The current optimism on semiconductor stocks is fueled by the approaching transition to 5G wireless networks. While chip demand is generally low right now, telecom providers are getting ready to switch from 4G to 5G – and that switch will require new chips. Control systems, modems, smartphone devices – companies and customers will see new 5G-compatible models in the next 12 months, and every device will need 5G compatible chips. The chip makers are looking at a resurgence of business next year, and that outlook is starting to lift the chip stocks. Logan Purst, industry analyst from Edward Jones, gave a succinct description of the recent gains in chips: “What’s being priced into these stocks is a rebound next year.”
Here we’ve searched for large cap tech stocks and found three upwardly mobile chip stocks in the results. These are companies that have shown solid gains so far this year, as they recover from last year’s malaise. While all will gain from the 5G switchover, their individual paths to success are unique.
Micron Technology, Inc.
The smallest of the chip makers we’re looking at here, Micron (MU – Get Report) posted $31.8 billion in total sales for 2018, the fifth highest total among the world’s largest semiconductor companies. MU shares are up 59% year-to-date. Much of their momentum has been recent, as the three-month gain is 48%. Indeed we can see that best-performing investors have Very Positive sentiment on MU right now according to TipRanks Smart Portfolio. And analysts expect the recent momentum to help the company’s bottom line in next week’s fiscal Q4 earnings report. EPS is forecast at 43 cents.
Longbow analyst Nikolay Todorov sees memory as the catalyst for MU’s future success. He writes, “We are turning more positive on memory fundamentals as we now believe excess inventory will be depleted faster than expected, triggering an improvement in pricing and margin ahead of current expectations.” Todorov’s $66 target suggests a strong upside of 30%.
Mark Delaney, from Goldman Sachs, agrees that Micron will benefit from increased memory chip demand during the 5G transition, and that the upcoming earnings report will be the first sign. Anticipating a healthy quarter, he has raised his price target by 5%, to $59, and says that he expects “EPS to be above the mid-point of guidance, as increased bit volumes should help results in the August quarter.” His new price target suggests room for a 17% upside.
Overall, MU stock has 15 buy ratings, 6 holds, and 2 sells assigned in the past three months. This gives the stock a consensus rating of Moderate Buy. MU sells for $50.48, and its recent gains have pushed it right up to the average price target of $51.14.
Nvidia (NVDA – Get Report) is well known to gamers, as the company specialized in the GPUs necessary for a quality gaming experience. The stock, however, took a heavy beating at the end of 2018, reflected in steep quarterly declines reported in February of this year. NVDA shares are turning around, however, and in August reported the third quarter in a row of increasing EPS. Earnings, at 91 cents, beat the 87-cent forecast by 4.4%. Forecasts the November 2019 report show an expected $1.24 per share in earnings. The last time Nvidia reported over $1 in EPS was in November of last year.
Share price movement is reflected the recovery in earnings. NVDA is up 34% year-to-date, and as with Micron, the recent momentum is strong. The three-month gain is 17.6%.
Writing at the end of August, Benchmark’s 5-star analyst Ruben Roy initiated his coverage of NVDA with a buy rating and a $210 price target. He wrote, “Nvidia is positioned for faster growth relative to semiconductor peers given the increasing use of GPUs across a diverse set of markets.” Roy’s target implies an upside of 16% for NVDA shares.
UBS analyst Timothy Arcuri weighed in on Nvidia more recently, also with a buy rating. He sees the company showing steady profitability going forward, saying, “On gaming, we see ~$1.25-1.3B core gaming (ex-Switch) as very do-able for FQ3:20 (Oct) and seasonality should add a big FQ4 tailwind. Additionally, the ~$1.4B/Q normalized revenue is backward looking, and a forward-looking number should likely be as high as ~$1.7-1.8B/Q given annual unit growth.” Arcuri’s price target indicates room for an 8.3% upside to Nvidia’s stock.
Nvidia’s analyst consensus is a Moderate Buy, derived from20 buys, 5 holds, and 2 sells set by top analysts in the last three months. The stock’s $187 average price target suggests an upside potential of 4.4% from the current share price of $179. As with Micron, the company’s recent share price gains have pushed the stock up to the price target faster than the analysts could react.
Holding the seventh spot for revenues among the chip giants, Qualcomm (QCOM – Get Report) posted $16.5 billion in total sales for 2018. The company has shown robust growth year-to-date, with gains of 38%, with a three-month gain of 10.7%. In addition to strong recent momentum, Qualcomm has continued to payout a generous dividend of $2.48 annually. The yield, at 3.14% is more than 50% higher than the average dividend yield in the S&P 500.
Qualcomm has had a share of legal ups and downs in recent months. Earlier this year, the company reached a settlement with Apple (AAPL – Get Report) over a patent dispute. As part of the agreement, Apple agreed to pay out a cash settlement of $4.5 billion. In addition, Apple agreed to pay royalties on future use of Qualcomm’s chips. In the FTC v. Qualcomm case, however, the company was handed some bad news – Judge Koh ruled that Qualcomm was violating antitrust laws with its requirement that customer’s sign licensing agreements to use the company’s products. That ruling was stayed by the appellate court in August, giving Qualcomm a reprieve and a chance to prepare new legal arguments.
Writing form Canaccord Genuity, 5-star analyst Michael Walkley sees the recent stay as reason for a bullish stance on QCOM. He writes, “The 9th Circuit Court granted a partial stay from Judge Koh’s FTC ruling by placing on hold the provisions requiring Qualcomm to grant patent licenses to rival chip suppliers and end its practice of requiring its chip customers to sign a patent license before purchasing chips.
“This stay, along with the recent successful licensing renegotiation with LG Electronics, as evidence Qualcomm’s current licensing business practices could have limited long-term impact from the Judge Koh ruling.”
Walkley sets a price target of $87 on QCOM, suggesting a 10% upside to the stock.
Like its peers, Qualcomm currently holds a Moderate Buy from the analyst consensus. This is derived from the 6 buys, 9 holds, and 1 sell given the stock in the past 90 days. QCOM shares sell for $78, and, also like its peers, the stock’s recent gains have pushed its share price right to the average price target.
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