It’s been a rough 2022 for semiconductor stocks amid fears of a sharp economic slowdown that would depress chip demand.
The PHLX Semiconductor Sector index has dropped 22% year to date.
But Bank of America analysts see some reasons for optimism.
“Macro factors can enhance stock volatility,” they said in a commentary. But “the recent 36% peak-to-trough [price-to-earnings-multiple] contraction in the semiconductor index (versus a 27% downturn historically) already reflects a medium-sized recession,” the analysts said.
“Meanwhile, chip stocks are generating 23% free-cash-flow margins,” which makes them more than twice as profitable as S&P 500 stocks.
“While semi demand is cyclical, with the exception of 2012, semi sales have always had positive year-on-year growth as long as global GDP growth stayed above 3%,” the analysts said.
That’s now the case, with growth estimated at 3.3% for 2022 and 3% for 2023, the analysts said.
Further, “in prior times, only a single end market, say, personal computers or smartphones, would drive semis,” the analysts said.
“Now there are multiple end markets served by a consolidated set of chip vendors, delivering proprietary products and generating solid free-cash-flow margins.”
Bank of America's top pick for large-cap chip stocks is Nvidia (NVDA). Its top small-to-mid-cap pick is ON Semiconductor (ON).
The analysts’ top picks according to theme are:
Cloud: Nvidia, Advanced Micro Devices (AMD) and Marvell Technology (MRVL).
Automobiles: ON, Analog Devices (ADI) and NXP Semiconductors (NXPI).
Capital Expenditures: KLA (KLAC), GlobalFoundries (GFS), Applied Materials (AMAT), Lam Research (LRCX) and Teradyne (TER).
Morningstar's Take on Nvidia...
Morningstar analyst Abhinav Davuluri assigns the company a wide moat and puts fair value for the stock at $200, 5% above a recent quote of $190.
“Management [has] noted second-quarter revenue will be negatively affected by $500 million to account for covid-19 lockdowns in China and the stopping of sales to Russia,” he wrote in a commentary.
Despite that obstacle, “we view Nvidia as our top fabless semiconductor pick, as we think the firm’s data-center business will prove resilient to macroeconomic headwinds.”
Overall, “Nvidia is the top designer of discrete graphics processing units that enhance the visual experience on computing platforms,” Davuluri said.
...and on ON Semi
Morningstar analyst William Kerwin gives the company a narrow moat and puts fair value for the stock at $67, 6% above a recent quote of $63.
“On Semi’s strong first-quarter results reaffirmed our confidence in management’s long-term vision for realigning the company toward stronger growth and profitability,” he said in a commentary.
“We think the firm’s focus on differentiated solutions for electric vehicles, autonomous vehicles, and renewable energy infrastructure is being rewarded on the top and bottom lines.”
Further, “we think investment in silicon carbide, while already reaping results, will pave [the way for] long-term growth.”
