Merrill Lynch Bullish on Two Semiconductor Stocks: Skyworks Solutions Inc (SWKS), NVIDIA Corporation (NVDA)

Semiconductor companies Skyworks Solutions Inc (NASDAQ:SWKS) and NVIDIA Corporation (NASDAQ:NVDA) share more than just common industries; both companies have also acquired bullish ratings from analysts at Merrill Lynch. While Skyworks experienced a change in its management and executive positions, Nvidia Corporation is playing up its growth factors and company strengths.

Skyworks Solutions Inc

Skyworks recently faced a switch up in its board members, as CEO David Aldrich has been replaced with company veteran Liam Griffin. In light of this adjustment, Merrill Lynch analyst Vivek Arya is offering his take on what this will mean for the company’s future.

Arya seems confident Griffin will prove to be a valuable asset to the company as CEO, noting his “extensive background in sales, marketing, R&D, and operations.” This being said, the analyst explains though Griffin is a good choice, the change in CEO position will have little impact on company strategy or execution. Arya mentions, “Even though his responsibilities have expanded, we do not anticipate any major change in SWKS’ growth opportunities in mobile data/connectivity/RF (radio frequency), or in SWKS’ track record of consistently strong execution.”

Further, the analyst explains that even though Aldrich is stepping down from CEO, he will still hold an executive position as Chairman and will maintain decision making capabilities. Arya elaborates, “[Aldrich] is still expected to be around as an Executive (read: hands-on) Chairman and we think will likely play a role in providing continuity. We also note CFO Don Pallete remains in place which provides further continuity.”

Aside from the shift in executive positons, the analyst discusses SWKS’s volatile relations with Apple. Being one of Apple’s semiconductor suppliers, weakness in iPhone demand can easily influence SWKS. Arya remains hopeful in this regard explaining that although iPhone sales are currently soft, the release of the iPhone 7 should boost sales rapidly in June and July.

To play safe, Arya expects SWKS to explore more merger and acquisition opportunities in attempt to diversify its business away from Apple and the smartphone market as a whole. He explains, “SWKS’s strong, unlevered balance sheet and $1.3bn+ in annual EBITDA provides sufficient flexibility in our view. Its recent attempt at acquiring PMCS was unsuccessful and that has created a near-term overhang on the stock.” Arya believes the company should play up its areas of strength, namely, “operations, back-end packaging expertise, and intimate knowledge of internet of things/mobile/connectivity markets” as advantageous factors in moving forward with M&A opportunities. Arya stresses the importance of improving M&A’s as “diversifying M&A might take [SWKS] outside core markets and make it harder to create cost synergies, in our view.

Vivek Arya has an overall bullish outlook on Skyworks Solutions, and reiterated a Buy rating on the stock with a $61.66 price target.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Arya is ranked #315 out of 3,907 analysts, with a success rate of 49% and an average return of 11%.

SWKS has an analyst consensus rating of Strong Buy, with 85% of analysts bullish, and 15% of analysts neutral. The average price target for the stock is $86.82 with an upside of 43%.

NVIDIA Corporation

NVIDIA Corporation, an investor-favorite stock pick in the realm of semiconductors, has been coined by Merrill Lynch analyst Vivek Arya as the “top large-cap semiconductor growth stock”.

Arya reiterated a Buy rating on NVDA with a price target of $50.00 (up from $43.00). The analyst also raised his fiscal year 2017/18 estimate by 12c/2c to $2.05/$2.07 naming the stock “our top non-consensus recommendation.”

Arya notes that a key surprising factor in the recently released Q1 earning report was the 67% year over year surge, versus flattish consensus estimate. Furthermore, the analyst elaborates on company growth factors, which enabled Nvidia to transform from a mere PC component vendor to a technology company. Namely, the company’s PC gaming sector experienced a 15-20% growth, provided new and richer product mix, and introduced the appealing aspect of Virtual Reality. NVDA’s auto subdivision also showed a 20%+ growth due to informative media marketing, the appeal of self-driving cars, and improved engines. Finally, data center acceleration witnessed an impressive 60%+ growth this year as Nvidia strengthened ties with top cloud customers including Facebook, IBM Watson, Google, and Alibaba.

Apart from these very beneficial aspects, possible risks for NVDA are heightened manufacturing costs, Intel royalty roll-off, and the launch of FinFet based Pascal which had a negative effect on the company’s GM pipeline, and resulted in increased opex engineering costs. Arya remains optimistic in spite of these potential risks mentioning, “the benefits of Pascal (inflection in data center, growth in PC gaming) will likely far outweigh the opex growth in our view. Second, auto gross margins are lower as NVDA sells more modules rather than just chips. Third, the well-known Intel roll off early next-year (already in model) could create temporary GM headwinds and suppress EPS growth in FY18/CY17.”

According to TipRanks, NVIDIA holds an average analyst consensus rating of Moderate Buy, with 50% of analysts bullish, 46% of analysts neutral, and 4% of analysts bearish on NVDA. The average price target for the stock is $38.50 with a (-6.05%) downside.


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