Despite concerns that problematic inventory levels as well as flaring trade tensions would weigh down the semiconductor industry, the sector has still been able to grow with the VanEck Semiconductor ETF up 40% year-to-date. Adding to the good news for investors, one of the best-performing analysts believes that several catalysts could drive even more gains for semiconductor stocks.
“Our prevailing takeaway is that the multi-quarter inventory correction, which started in earnest in July 2018, is largely over and inventory levels have bottomed. Despite the near-term macroeconomic volatility, we believe there will be a number of catalysts in 2020 that will have a positive impact the semiconductor industry,” Needham’s Rajvindra Gill wrote in a note to clients on September 11.
Bearing this in mind, we used the TipRanks Stock Comparison tool to take a closer look at how a few of the stocks in this space stack up against each other. Our comparison was based not only on yearly gain, but also analyst consensus and average analyst price target.
Here’s what we found out.
Micron Technology Inc.
Despite widespread volatility throughout the semiconductor space, shares of memory chip provider Micron ( MU - Get Report ) have climbed 59% year-to-date, the highest out of the stocks on the list. Based on the improved outlook for the sector, even more gains could be on the way.
According to Gill, the primary catalyst expected to drive growth for MU is an improvement in the memory cycle. Recently, MU experienced issues related to weaker DRAM and NAND demand and pricing as a result of higher inventories. DRAM, dynamic random-access memory, is used in desktop computers and servers, while NAND is flash memory that’s typically found in smartphones and solid-state hard drives.
It should be noted that Needham’s research suggests that while NAND and DRAM supply levels remain higher than normal, the memory cycle is improving. Additionally, while price declines are slowing down, the deceleration hasn’t bottomed out with a normal supply and demand balance mostly likely expected through the first half of 2020. That being said, investors can expect a turnaround in 2020 thanks to several demand catalysts such as normalized hyperscaler spending, specifically at Microsoft ( MSFT ) and Amazon Web Services ( AMZN ), with the most notable driver being 5G.
5G smartphones represent a major upgrade cycle in 2020. According to Gill, the amount of 5G smartphones could reach 120 million to 140 million units at the mid-point in 2020. With every original equipment manufacturer (OEM) looking to get in on the trend, 5G creates several growth opportunities for MU.
While some investors have expressed concerns regarding MU’s dependence on Huawei, Gill believes MU has “de-risked” its exposure going into Q3. As a result of all of the above factors, the five-star analyst kept his Buy rating and $50 price target.
All in all, the Street takes a cautiously optimistic stance on MU. With 14 Buy ratings vs 5 Holds and 2 Sells assigned in the last three months, MU is a ‘Moderate Buy’. It has an average price target of $51, suggesting 0.04% upside. The low upside potential makes sense given the fact that share prices have soared year-to-date.
Skyworks Solutions, Inc.
Skyworks ( SWKS - Get Report ) designs semiconductors for cellular infrastructure as well as for radio frequency applications. With shares already up 23% year-to-date, Gill has high hopes for SWKS thanks to 5G.
Similar to MU, Skyworks is expected to get a significant boost in 2020 with the 5G smartphone rollout. The fact that the minimum requirement for every 5G phone is 6GB of DRAM bodes well for the company. However, Gill points out that 5G infrastructure could be an even bigger driver of growth.
In order to make 5G a reality, mobile broad brand will need to be upgraded in order to enable higher data transmissions for portable devices. Networks also require very low latency as well as smart manufacturing.
Telecommunication providers have ramped up efforts to get ready for 5G, with this especially apparent in China. In 2019, three major Chinese mobile operators increased their year-end base station deployments. Adding to the good news, 5G licenses were approved in June, earlier than previously expected. As a result, China bumped up its 5G base station deployments for 2020, with its overall target now at 500,000.
“As operators are aggressively expanding the power supplies to meet requirements (5x increase in MOSFET usage in 5G radios and the expected 3-5x increase in the number of 5G base stations compared to those in 4G), SWKS stands to reap the benefits,” Gill noted. He adds that investors should take comfort in that fact that the company has also reduced its Huawei exposure. As a result, the Needham analyst maintained his Buy rating and $95 price target. He tells investors that SWKS could see a 16% gain in the next twelve months.
The word on the Street is more mixed. 6 Buy ratings and 7 Holds received in the last three months add up to a ‘Moderate Buy’ analyst consensus. Its $87 average price target indicates 6% upside potential.
Microchip Technology Inc.
The last semiconductor stock on our list develops chips for many applications including displays, computing, wireless connectivity as well as several others. Despite being the target of recent negative media attention, Microchip ( MCHP - Get Report ) could see its 32% year-to-date gain surge even more.
Investors were not happy to learn on September 3 that the company maintained its lackluster guidance for second quarter fiscal 2020. Management stated that as a result of the U.S.-China trade war, it expects to see quarterly revenue fall between $1.323 billion and $1.375 billion. This was incredibly disappointing as it represents zero to 4% growth.
That being said, Gill believes a turnaround could be on the way as shares are trading at a multi-year P/E discount based on its computer vision products and advanced driver-assistance systems (ADAS). The organic light-emitting diode (OLED) market could see a major investment cycle in the next two to three years. While OLED does cost about 5% to 10% more than LCD displays and takes slightly longer to manufacture, these costs are expected to narrow very soon.
The flexibility of OLED displays makes the technology especially useful in touch IC applications. Based on this, Gill believes OLED will take over the industry which is good news for MCHP. “We think OLED will account for over 50% of the smartphone market. Our conversations point to rapid OLED adoption at the major OEMs and expanding OLED formats (flexible, rigid and foldable) across the high-end and mid-range portfolio,” he explained.
As a result, Gill maintained his Buy rating and $100 price target on MCHP. He is confident that shares have the potential to gain 5% in the next twelve months.
The rest of Wall Street mirrors the analyst’s sentiment. MCHP boasts a ‘Strong Buy’ analyst consensus as well as a $108 average price target, suggesting 14% upside potential, beating out both MU and SWKS in terms of each of these factors.