It’s been a tough 2022 for semiconductor shares amid fears of a pointy financial slowdown that may depress chip demand.
The PHLX Semiconductor Sector index has dropped 22% yr so far.
But Bank of America analysts see some causes for optimism.
“Macro factors can enhance stock volatility,” they stated 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 stated.
“Meanwhile, chip stocks are generating 23% free-cash-flow margins,” which makes them greater than twice as worthwhile as S&P 500 shares.
“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 stated.
That’s now the case, with progress estimated at 3.3% for 2022 and three% for 2023, the analysts stated.
Further, “in prior times, only a single end market, say, personal computers or smartphones, would drive semis,” the analysts stated.
“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 high decide for large-cap chip shares is Nvidia (NVDA) – Get NVIDIA Corporation Report. Its high small-to-mid-cap decide is ON Semiconductor (ON) – Get ON Semiconductor Corporation Report.
The analysts’ high picks in keeping with theme are:
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Cloud: Nvidia, Advanced Micro Devices (AMD) – Get Advanced Micro Devices, Inc. Report and Marvell Technology (MRVL) – Get Marvell Technology, Inc. Report.
Automobiles: ON, Analog Devices (ADI) – Get Analog Devices, Inc. Report and NXP Semiconductors (NXPI) – Get NXP Semiconductors NV Report.
Capital Expenditures: KLA (KLAC) – Get KLA Corporation Report, GlobalFoundries (GFS) – Get GlobalFoundries Inc. Report, Applied Materials (AMAT) – Get Applied Materials, Inc. Report, Lam Research (LRCX) – Get Lam Research Corporation Report and Teradyne (TER) – Get Teradyne, Inc. Report.
Morningstar’s Take on Nvidia…
Morningstar analyst Abhinav Davuluri assigns the corporate a large moat and places honest worth for the inventory at $200, 5% above a latest 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 impediment, “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 stated.
…and on ON Semi
Morningstar analyst William Kerwin provides the corporate a slim moat and places honest worth for the inventory at $67, 6% above a latest 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 stated 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.”