By Michael Marcus
Last year saw a serious tumble for semiconductor chip manufacturers, as chip makers were pummeled by a series of factors that depressed the industry. From continued evidence of China’s economic slowdown, to the US-China trade tensions, and including slumps in cryptocurrency mining and Apple’s iPhone sales, there just wasn’t enough demand for chips.
That’s turned around since the end of December. Investors are less anxious after the double boost of President’s Trump and Xi praising the trade negotiations and the US Federal Reserve pausing its policy of interest rate hikes. The general improvement in investor sentiment has unleashed a market turnaround in the first three months of 2019, and the chip makers are riding the wave. We can use TipRanks’ new Stock Comparison Tool to see how three American semiconductor companies stand, in the market and in relation to each other.
AMD: The Bull-Bear Debate Continues…
Advanced Micro Devices (AMD) is a mid-size player in the chip industry, but even so stands as Intel’s (INTC) major competitor in the market for x86-based microprocessors, and as Nvidia’s (NVDA) main rival in the graphics processing unit field. The company’s plans for long-term financial growth include achieving double-digit revenue growth, hitting gross margins between 40 and 44%, and reaching 75 cents EPS. Before dismissing these goals as grandiose, consider that the company’s stock is up more than 750% over the last three years.
Some of the market’s top analysts, however, are splitting on AMD stock. Speaking for the bears, Credit Suisse analyst John Pitzer sets a ‘hold’ on AMD. In his comments, he takes the position that “AMD’s 2019 guidance is optically aggressive since it implies the fastest quarter-over-quarter growth in the company’s history.”
Other analysts are more bullish on AMD’s goals. Mitch Steves of RBC Capital says the real question to ask here is, “How to model for high-single-digit revenue growth in 2019?” He points out growth in the 7nm chip segment, and points out that “Data Center specific graphics chips are likely to grow materially in 2019E due to a low base.” Steves sets a $34 price target on AMD, implying a 46% upside.
Stifel’s Kevin Cassidy is equally bullish. He looks at AMD’s current price point, and recommends that “investors use any AMD share weakness to build a long position.” Like Steves, Cassidy’s $34 price target suggests 46% upside potential to this stock – so the current price of $23 may be a discount entry point.
Overall, AMD gets a ‘Moderate Buy’ rating from the analyst consensus, based on an even split: 9 ‘buys’ and 9 ‘holds’ ratings. The average price target stands at $26, suggesting the stock has about 13% from the current trading price. (See AMD’s price targets and analyst ratings on TipRanks)
All Eyes on Micron’s Upcoming Earnings
Micron (MU) is one of two American companies among the top five semiconductor producers globally; the other is Intel. But where Intel is losing market share, and has lost the #1 spot to Samsung, Micron’s sales grew 33% from 2017 to 2018. Micron is best known for its memory devices, especially USB drives and other solid-state memory technology.
High production has led to oversupply in the chip industry, driving prices down and causing Micron’s only real headwind as the higher inventory causes weaker demand. That doesn’t seem to bother Mizuho’s Vijay Rakesh, however. The five-star analyst notes that Micron will report quarterly earnings on March 20, and consensus estimate for an EPS of $1.67.
So, earnings look solid, despite a soft chip market that Rakesh examines in detail. HE gives MU shares a price target of $44, saying “We are adjusting our MU estimates to reflect potential weaker DRAM/NAND pricing in the FebQ/MayQ.” Despite his market skepticism, Rakesh’s target implies an upside of 11% for MU.
Ruben Roy, writing from MKM Partners, also gives a $44 target to MU. He says, “We continue to view MU positively, from a longer-term perspective, given our view that demand for higher-value memory products will continue to increase over the next several years.”
Finally, looking at a best-case scenario is Ambrish Srivastava at BMO Capital. Srivastava says, “Yes, memory fundamentals have deteriorated. And when we upgraded the shares as the year started, we said we expected conditions to get worse before they got better. DRAM contract pricing took a step down in January and will continue to go down. We are now modelling for the lowest point in y/y deceleration in DRAM pricing to occur in F4Q but lower at a y/y change of down 45% vs. 37%.”
His price target is bullish, at $50, reflecting the moderation he sees occurring in the market headwinds ahead. His target suggests a potential upside of 26% for MU.
TipRanks suggests caution has Wall Street fairly divided in its expectations on MU stock. Out of 20 analysts polled in the last 3 months, the bulls rule the majority, with 11 rating a Buy on the chip giant vs. 9 who maintain a Hold. With a return potential of nearly 14%, the stock’s consensus target price stands at $46.08. (See MU’s price targets and analyst ratings on TipRanks)
Broadcom Is a Great Growth Story, Though Some Remain Skeptic
Broadcom (AVGO) was the sixth largest chip maker at the end of 2018, with more than $18 billion in annual semiconductor sales. Broadcom’s Q1 earnings report, released on March 14, showed an EPS 8% higher than expectations, a firm indicator of profitability. The company’s products are found throughout the tech sector, in the broadband, data center, networking, and wireless markets.
Having those entries in every field gives Broadcom a definite advantage, one noted by UBS analyst Timothy Arcuri. Arcuri is skeptical about the semiconductor industry in the second half of 2019, seeing a slowdown in demand and production, but he says that AVGO is a “company-specific story that can’t be doubted, given key product cycles in networking and big forthcoming content gains for iPhone.” Still, his price target of $300 shows the limits of his optimism, as it implies an upside of just 2%.
Jim Kelleher, from Argus, takes a more bullish stand with his ‘buy’ rating. Looking at future markets, he says, “With the increasing pivot toward 5G, Kelleher also believes that over time, there will be a rebound in sales into the device market – first for infrastructure and then toward the handsets.” He gives Broadcom a $350 target, suggesting a 19% potential upside.
Broadcom has a ‘Strong Buy’ from the analyst consensus, based on 21 ‘buys’ and 5 ‘holds.’ The stock’s current share price is $293, so the $311 average price target gives AVGO a 6% upside potential.