Semiconductor stocks have tumbled in recent months amid flagging demand, with the S&P Semiconductors Select Industry Index dropping 36% year to date.
That might create buying opportunities for you. Bank of America analysts recently discussed their favorite choices in the sector.
“Near-term, we favor non-consumer oriented markets,” they wrote in a commentary. “We acknowledge the risk of a rolling correction from consumer to data center and auto/industrial markets.”
But, they said, “areas with strong backlog and manageable channel inventories should provide a buffer in the event of slowing demand.”
The analysts like auto-related semiconductor companies:
· On Semiconductor (ON),
· NXP Semiconductors (NXPI),
· Analog Devices (ADI),
Cloud/networking companies:
· Marvell Technology (MRVL),
· Broadcom (AVGO) (given its large non-Apple business), and
Foundry vendors with strong exposure to lagging edge, where constraints persist:
· GlobalFoundries (GFS).
Morningstar’s Take on Analog Devices
Morningstar analyst Brian Colello assigns the company a wide moat and puts fair value for the stock at $172. It recently traded at $140.50.
Analog Devices is one of the world's largest analog chipmakers.
“We think it is well-positioned to profit from more advanced and higher-priced semiconductor content in automobiles, 5G wireless equipment, and industrial applications like medical devices and factory automation equipment in the years ahead,” Colello wrote in a commentary
He likes the company because of its proprietary analog designs and high customer switching costs. Moreover, “high-quality analog chipmakers tend to retain design wins as long as the end product is being built,” Colello said.
Morningstar’s Take on Broadcom
Morningstar analyst Abhinav Davuluri gives the company a narrow moat and puts fair value for the stock at $624. It recently traded at $449.
“Longer-term, we think Broadcom is part of the heavyweight class of technology leaders and boasts intangible assets around the designs of products that go into a bevy of end markets,” he wrote in a commentary.
The company does well in the high-end smartphone space, predominantly with business from Apple, Davuluri said.
“The company also boasts market leadership positions in areas such as networking switches, Wi-Fi chips, set-top box chips, enterprise storage chips, and fiber channel switch products,” he said. “These segments generate solid cash flow.”
Morningstar’s Take on GlobalFoundries
Davuluri offers the company no moat and puts fair value for the stock at $45. It recently traded at $49.
“GlobalFoundries is the world's fourth-largest dedicated contract chip manufacturer, or foundry,” he wrote in a commentary.
“GlobalFoundries has benefited from the transition by most semiconductor companies from integrated device manufacturers to fabless business models.”
Still, “while we expect the firm to enjoy solid growth, we do not believe it has an economic moat,” Davuluri said.
“The rise of fabless semiconductor companies has created attractive growth prospects for the foundry segment, which has in turn encouraged competition.
“In contrast to leading-edge foundries …, GlobalFoundries operates at more mature process technologies and competes against the likes of United Microelectronics (UMC) and SMIC.”
