Semiconductor stock picks that provide value.
This year has been a bounce-back year for semiconductor stocks. The PHLX Semiconductor Sector index is up more than 57%, far exceeding the returns of the S&P 500 index or even the technology sector as a whole. However, Bank of America analyst Vivek Arya says the 2019 rally in semiconductor stocks has driven the average earnings multiple in the space up to around 19, well above its historical average of 15. Arya says this multiple expansion has made it more difficult to find semiconductor value stocks to buy in 2020. Here are his eight top semiconductor value picks.
Intel Corp. (ticker: INTC)
Arya says Intel faces manufacturing headwinds in 2020, but its valuation is among the lowest under his coverage. Arya says Wall Street tends to underestimate the advantages of market share leaders such as Intel in maintaining their positions over time. Intel has lagged semiconductor peers for two years now and Arya says 2020 may finally be the year Intel closes the performance gap. Intel trades at just 11.4 times Bank of America's 2020 earnings estimates, well above the semiconductor average of 24.6 times. Bank of America has a "buy" rating and $70 price target for INTC stock.
Outside of Intel, Arya says Broadcom represents the best valuation within the semiconductor group. Broadcom shares trade at just 12.2 times projected 2021 earnings compared to a 20.9 average multiple for the semiconductor group as a whole. Arya says Broadcom's potential exit from the wireless business and an increasing focus on software may create near-term headwinds, but analysts are being too negative regarding potential competitive threats. In addition to its valuation upside, Broadcom pays a 3.9% dividend yield. Bank of America has a "buy" rating and $360 price target for AVGO stock.
NXP Semiconductors (NXPI)
NXP Semiconductors performed well in 2019, but shares are up just 7.6% overall since the beginning of 2018. Arya says there are plenty of things to like about NXP in 2020: The stock trades at just 15.1 times projected 2020 earnings; it recently implemented a $2 billion buyback program; its Dutch domicile is advantageous given the U.S. trade war with China; and it is exposed to multiple new product cycles in the auto, mobile wallet and internet of things markets. Bank of America has a "buy" rating and $145 price target for NXPI stock.
ON Semiconductor Corp. (ON)
ON Semiconductor is another strong 2019 performer that is up just 13.8% since the start of 2018. Arya says ON is a high-quality free cash flow stock with long-term earnings leverage that should significantly boost gross margins. Access to lower-cost 300 millimeter manufacturing capabilities will add to ON's profitability, Arya says. Management recently said the China auto market is stabilizing and ON has been proactive in protecting its cash flow in a difficult environment. ON shares trade at just 14.7 times 2020 earnings. Bank of America has a "buy" rating and $25 price target for ON stock.
Skyworks Solutions (SWKS)
Skyworks is a smartphone radio frequency chipmaker that Arya says will be a key winner from the multiyear rollout of global 5G wireless networks and devices. Arya is projecting at least 10% revenue growth and 15% earnings growth over the next three years. Despite the impressive growth outlook, Skyworks shares trade at just 16.5 times projected 2020 earnings. Apple (AAPL) now accounts for 51% of total revenue, making maintaining iPhone content share a potential risk for long-term investors. Bank of America has a "buy" rating and $122 price target for SWKS stock.
Qorvo is another RF chipmaker that Arya says will benefit from global 5G expansion. Like Skyworks, Arya is projecting double-digit revenue and earnings growth for Qorvo over the next three years. However, the stock trades at just 17.9 times projected 2020 earnings. Arya says there is currently less than 1% 5G penetration in roughly 1.4 billion global smartphones and hundreds of millions of additional connected devices. Arya estimates 5G upgrades could add up to $7 in RF content to most global smartphones. Bank of America has a "buy" rating and $130 price target for QRVO stock.
Microchip Technology (MCHP)
Arya recently raised his earnings and revenue growth estimates for Microchip Technology over the next three years due to strong year-end 2019 bookings. In addition, Microchip has exposure to key secular growth trends, such as 5G devices, electric vehicles, autonomous driving, internet of things and artificial intelligence. Microchip trades at just 15 times Arya's 2021 earnings estimate, roughly a 25% discount to peers. However, Arya says near-term upside may be limited given the company's high debt load and uncertainty surrounding its 2018 Microsemi Corp. acquisition. Bank of America has a "neutral" rating and $110 price target for MCHP stock.
Marvell Technology Group (MRVL)
Arya says Marvell Technology has the most "comprehensive collection of technologies" related to the 5G rollout and has heavy exposure to top 5G base station vendors. Arya projects double-digit revenue growth in the next several years, but the stock trades at just 18.9 times his 2021 earnings estimate. In the near term, Arya says Marvell's margins are under pressure and trade war uncertainty related to China could limit upside. In addition, weakness in the company's enterprise and legacy storage businesses could offset 5G-related growth. Bank of America has a "buy" rating and $32 price target for MRVL stock.
The best semiconductor stocks to buy for value:
-- Intel Corp. (INTC)
-- Broadcom (AVGO)
-- NXP Semiconductors (NXPI)
-- ON Semiconductor Corp. (ON)
-- Skyworks Solutions (SWKS)
-- Qorvo (QRVO)
-- Microchip Technology (MCHP)
-- Marvell Technology Group (MRVL)