The semiconductor industry is looking at better times ahead. This is good news for an industry that has been hard-hit by slower sales, as customers held back in anticipation of near-term system upgrades and as the US-China trade tensions brought the threat of higher tariffs and prices.
The coming implementation of 5G in conjunction with the natural replacement cycle of gaming consoles are boosting demand for faster processors and higher memory, a definite turn for the better. Even better for the industry, the US and Chinese governments are in the process of implementing a trade agreement that will turn back tariffs and loosen commerce restrictions. The chip industry stands to benefit on both ends, as it connects the two countries in a complex web of primary material and final product supply and sales.
TipRanks, a company that tracks and measures the performance of Wall Street analysts, has flagged two mid-sized semiconductor stocks from the database. Both have impressed the Street with rapid growth in recent months, and earn high marks from the platform’s Smart Score. The Smart Score is an aggregation of TipRanks’ data on a stock, pulling together a wide range of factors to put a single intuitive score on every stock in the database. According to the Smart Score, these stocks are likely to outperform the markets in the coming year.
Let’s delve a little deeper and find out why analysts believe they are compelling buys.
Applied Materials, Inc. (AMAT)
Our first stock, Applied Materials, is a $56 billion company that makes integrated circuit chips for a range of electronics – flat panel display screens, TVs, and smartphones, among others. AMAT saw over $17 billion worth of sales in 2018, and netted a profit of $3.33 billion.
The stock’s Smart Score is a perfect 10. This doesn’t mean that every scoring factor is in the green, but a majority are. The stock’s 12-month momentum is highly positive, at 105%. The news sentiment is Very Bullish, showing that 100% of the press on AMAT has been positive in the past week. Financial bloggers, also, are positive, giving 81% bullish sentiment compared to a sector average of 68%.
The upbeat outlook is reinforced by the company’s recent fiscal Q4 earnings beat. EPS came in at 80 cents, 5% higher than the forecast, and the quarterly revenue of $3.75 billion was 2% higher than the estimates. It was a solid earnings release, and while the numbers are down from one year ago the movement is clearly in an upward direction. Share appreciation is also positive – AMAT has gained 88% in 2019, more than triple the S&P 500’s 29% gain.
4-star analyst from Evercore ISI, C J Muse, recently conducted a review of the semiconductor industry as a whole. His take on the collective outlook for the sector is bullish, and he says that current prices represent a good point of entry for investors. Regarding AMAT, Muse writes, “We model service revenues of $4.65B in CY21. If we assume conservative $1.5B in display, this translates into total revenues of $18.2B.” He reiterates his Buy rating on the stock and raises his price target to $75, indicating a 22% upside potential. (To watch Muse’s track record, click here)
AMAT’s Moderate Buy consensus rating is based on 19 recent analyst reviews, including 14 Buys, 3 Holds, and 2 Sells. The stock sells for $61.52, and the $66.12 average price target indicates a modest upside of 7.5%. (See Applied Materials stock analysis at TipRanks)
Nvidia Corporation (NVDA)
With Nvidia, we start getting to the large end of the semiconductor industry. At $146 billion, Nvidia has nearly triple the market cap of AMAT, and is an industry leader in the graphics processing unit segment. Nvidia’s GPUs are marketed to both the gaming and professional industries. The company is also heavily invested in the data center segment.
Nvidia’s solid foundation in the gaming market – its GPUs are popular among gamers who need fast processors for a smoother play experience – gives it the base it needs for solid market performance. The company reported Q3 results in November, and beat estimates on both revenues and EPS. The top-line number came in at $3.01 billion, besting the $2.91 billion estimate. EPS, at $1.78, beat the forecast by 21 cents. These numbers are down year-over-year but are trending upwards. Share prices are up, and NVDA has gained an impressive 79% this year.
NVDA’s Smart Score analysis comes out to a 9, a high score indicating outperformance ahead for the stock. In addition to the bullish blogger and news sentiment, NVDA adds very positive investor sentiment. Individual investors have increased their purchases of this stock in both the last 7 and 30 days.
Aaron Rakers, 5-star analyst with Wells Fargo, recently reiterated his Buy rating on NVDA and boosted his price target to $270, for a 13% upside. In his comments on the stock, Rakers wrote, “Nvidia’s data center gross margin is likely to be into the low/mid-70% range, 10 points above the corporate gross margin.” He added, “We maintain a positive view on the strategic positioning / future leverage of NVIDIA’s pending acquisition of Mellanox (close in early-2020).” (To watch Rakers’ track record, click here)
Nvidia shares sell for $238.56, and the average price target is $239. This leaves the stock with a minimal upside of 0.39%, an artifact of recent share gains that have pushed the stock right up to the target. The stock’s Moderate Buy consensus rating is based on 29 analyst reviews from recent months, which include 22 Buys – but also 6 Holds and 1 Sell. (See Nvidia stock analysis at TipRanks)
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