The stock market is currently caught in a somewhat volatile trading range. The news headlines are far from pretty – the ranks of newly unemployed jumped to 22 million in the U.S. since policymakers are keeping people home to stem new coronavirus infections. Economic growth came to a standstill to end the first quarter, and start the second.
But there are pockets of strength, and will be more in the coming months. Once the economy gets to 2021, the year-over-year trends in next year’s first and second quarters could be eye-popping. Healthcare is holding up very well for obvious reasons. Technology is another standout.
Indeed, a nice strategy right now is to seek out top names in technology. Investment firm Needham recently did that in its technology hardware space, which had been riding high as it’s been at the forefront of some important secular trends. Gamers like to game in any economic climate and are probably happy to have orders to stay at home. The stay-at-home trend is also driving cloud computing and the need for related chips and storage products.
Below are three names high on Needham’s list. We used TipRanks database to help analyze these compelling ideas in more detail.
Applied Materials (AMAT)
Semiconductor equipment maker Applied Materials makes integrated circuit chips for a wide range of electronics, including TVs, smartphones and flat panel display screens. Sales and profit estimates have been declining on the back of global economies that were put on hold to fight covid-19, but consensus estimates still project nearly 13% sales growth to $16.5 billion.
The expected sales growth is impressive given the near-term outlook for the world economy. Analysts also see strong earnings growth of 32% this year and EPS of $3.77. That puts the forward P/E at a very reasonable 14, which is a key reason that it is research firm Needham’s best idea in the tech hardware space. It also has a strong balance sheet and nearly enough cash on hand to cover its long-term debt.
5-star Needham analyst Quinn Bolton has a $73 price target on Applied Materials. That’s a projected gain of 37% ahead of the current share price of $53.16. (To watch Bolton’s track record, click here)
In Bolton’s view, semiconductor giants Intel, Samsung, and Taiwan Semiconductor don’t want to lose an inch of their competitive positioning in the current downturn and will keep their spending on important equipment to make their chips going.
According to Boldon, “we believe the foundry/logic spending environment remains stable as it is largely driven by process node migration at leading vendors,” including those listed above. This represents about half of Applied Material’s spending. The other half is from memory, which will struggle more “with smartphone demand reduced by the outbreak,” but still has a favorable long-term demand outlook.
Overall, the chip king is without question a Wall Street favorite, considering TipRanks analytics indicate AMAT as a Strong Buy. Out of 20 analysts tracked in the last 3 months, 16 are bullish on Applied Materials stock while 4 remain sidelined. With a return potential of nearly 26%, the stock’s consensus target price stands at $66.78. (See Applied Materials stock analysis on TipRanks)
Nvidia Corp (NVDA)
If there is a stock that investors have had been very happen to own so far in 2020, it could be video game and cloud computing chip maker Nvidia. The share price had fallen 16% YTD following what could turn out to be the height of covid-19 worries, but right now is sitting pretty with a 24% gain for the calendar year.
Returning to Needham’s recent report on top ideas, Nvidia is also on its list of best hardware ideas. Analyst Rajvindra Gill points out that Nvidia fits its investment criteria in the current tepid environment. The 5-star analyst loves Nvidia’s gaming exposure (48% of sales) that was growing anyway but will take off the longer people are required to stay hunkered down at home. Cloud computing is being driven by similar trends and represents 31% of Nvidia’s business.
Gill also sees increased resources being committed to the medical field to run sequencing in DNA and drug development to help develop a vaccine for covid-19. Nvidia’s GPU chips help support these efforts. Finally, it is in an even stronger financial position than AMAT – Nvidia can easily cover its $2 billion in long term debt with its $11 billion of cash in the bank.
Collectively, analysts project 65% profit growth and EPS of $7.45 for the year. Out of 30 analysts tracked by TipRanks, 26 say “buy,” while 3 suggest “hold” and only 1 recommends “sell.” The average price target of $306.14 is slightly above the current stock price of about $290, but it’s comforting to be investing in a stock that has exhibited such strength in a tough market. (See Nvidia stock analysis on TipRanks)
Micron Technology (MU)
Micron’s share price is down 15% so far this year so is lagging both the market and key semiconductor indices. This could be because sales are currently projected to fall nearly 14% to a hair over $20 billion. This isn’t really anything new though. Demand for memory devices is much more uneven.
Micron is another top idea of Rajvindra Gill (also covers Nvidia) in the hardware space. The emphasis on increased cloud computing as many workers stay home is driving its data center (storage) demand. Demand is also quickly recovering in China and represents 30% of Micron’s sales.
The near-term dip in demand for smartphones, consumer electronics, and automobiles will also impact demand for Micron’s chips. But Gill likes the reasonable P/E of 13.3 off his current annual EPS of $4.86. Underlying customers are also building demand in case supply chain disruptions continue, or resurface again in the fall.
Returning on last time to downside, Micron, like Nvidia, is also in an enviable financial position. It has an estimated $7.5 billion in cash on its balance sheet, which is more than enough to cover total debt of approximately $6 billion.
Gill reiterates a Buy rating on Micron shares along with a $63 price target, which implies about 40% upside from current levels. (To watch Gill’s track record, click here)
How does Gill’s bullish forecast echo against the word of the Street? Quite positively, it seems, as TipRanks analytics exhibit MU as a Buy. Based on 25 analysts tracked in the last 3 months, 19 rate the chip giant a Buy, 5 maintain a Hold, and only 1 says Sell. These analysts suggest that if everything goes as planned, MU will be a $62.50 stock in the next 12 months, implying nearly 40% return. (See Micron stock analysis on TipRanks)
Disclosure: The author has a Long position in NVDA.
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