Following a dreadful 2018, chipmakers are hot again on encouraging trade talks and a rebound in China’s manufacturing activity. Adding to the optimism is industry rationalization and slew of new technological trends like Internet of Things, high-end gaming and 5G wireless. At the same time, reports of smartphone market recovery are taking chip stocks higher.
Given the bullishness, investing in solid semiconductor stocks seems like a foolproof plan.
Trade Optimism, Stronger China Economy
The Philadelphia Stock Exchange Semiconductor Index, the benchmark for chipmakers, took a beating last year amid rising trade tensions between the United States and China. Also, Beijing’s weak economy was a serious headache for chipmakers as it could dent demand for semiconductor components. But, such worries have now ebbed significantly. This year, the index outpaced the broader S&P 500 on progress in U.S.-China trade talks and better-than-expected manufacturing numbers from the world’s second-largest economy.
Both the U.S. and Chinese trade officials have begun talks to bring an end to their prolonged trade dispute. Myron Brilliant, executive vice-president of international affairs at the U.S. Chamber of Commerce, recently said that “ninety percent of the deal is done, but the last 10% is the hardest part, it’s the trickiest part and it will require trade-offs on both sides.” Nonetheless, resolving most of the differences is a reassuring sign for chipmakers as they are heavily dependent on China for revenues.
China’s growth concerns, by the way, have dissipated to a great extent. China’s official Purchasing Managers Index made a stellar comeback in March, rising to a six-month high of 50.5 from 49.2 in February. Beijing took adequate steps like tax cutting to stimulate manufacturing activities.
The prospects of chipmakers have improved substantially this year on initiatives to improve efficiency. In the DRAM market, the number of producers has now consolidated to just three — Samsung Electronics, SK Hynix Inc. and Micron Technology, Inc. This structural change has improved efficiency and raised profit margins.
Equipment makers such as Lam Research Corporation are also producing chips of their own design. Such chips are much in demand from aircraft manufacturers to cloud computing behemoths like Alphabet Inc. and Amazon.com, Inc.
From high-end gaming, emergence of Internet of Things to automation, demand for chips continues to rise. Needless to say, e-sport, a multiplayer video game for professional gamers, needs thousands of semiconductor chips for production, while chips are an essential part of crypto mining as these provide the processing power needed for decoding blockchain algorithms. As long as investors continue to be bullish on the prospects of fifth generation of wireless connectivity or 5G, it is widely anticipated that demand for chips will improve.
Taiwan Semiconductor Manufacturing Company Limited’s, in the meantime, has signaled that smartphone orders are picking up in Asia. Taiwan Semiconductor will ramp up its 7 nanometer production rates due to an uptick in orders for Android devices. Thus, Taiwan Semiconductor is particularly expected to witness a strong second quarter of 2019. Others such as NVIDIA Corporation have also predicted a recovery in the second half.
To top it, NVIDIA’s nearly $7 billion purchase of Israeli chip designer Mellanox helped renew investors’ faith on the beaten-down sector. This is Nvidia’s biggest deal which has also strengthened its hold in the growing data center market.
5 Solid Choices
Banking on the strength, chipmakers are positioned to gain in the near term. We have, thus, short-listed five stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Xilinx, Inc. designs and develops programmable devices and associated technologies worldwide. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has risen 0.3% in the past 30 days. The company’s expected earnings growth rate for the current year is 23.7% compared with the Semiconductors - Programmable Logic industry’s projected rise of 22.5%.
KLA-Tencor Corporation designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has climbed 1.1% in the past 60 days. The company’s expected earnings growth rate for the current year is 5.4% compared with the Semiconductor Equipment - Wafer Fabrication industry’s estimated decline of 17.7%.
FUJIFILM Holdings Corporation develops, produces, sells, and services imaging, information, and document solutions worldwide. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has moved 1% north in the past 90 days. The company’s expected earnings growth rate for the current quarter is 102.9% compared with the Semiconductor Equipment - Photomasks industry’s expected rise of 91.6%.
Vishay Intertechnology, Inc. manufactures and supplies discrete semiconductors and passive components in the United States, Europe, and Asia. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has risen 4.3% in the past 60 days. The company’s expected earnings growth rate for the current quarter is 25% compared with the Semiconductor - Discretes industry’s projected rise of 21.2%.
Intel Corporation offers computing, networking, data storage, and communication solutions worldwide. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for next-year earnings has moved 1.9% up in the past 90 days. The company, which is part of the Semiconductor - General industry is expected to record earnings growth of 5.1% next year.