5 chip stocks to grow in H2
Author: EIS Release Date: Jul 13, 2021
With chip stocks growing 20% in H1, Bank of America has tipped five companies for H2.
AMD now at around $92 is given a price target of $120.
“We see a break-out for AMD’s data center business with server CPU share headed back to prior 25% peak (vs. 10-11% currently) driving pf-EPS of $4/sh (vs. CY22 cons at $2.65), driven by INTC potential product push-out (vs. AMD roadmap consistency), AMD supercomputing success (share up to 9.8%, 5x YoY) and Google endorsement (AMD 42% better price performance vs INTC/Arm peers),” says BoA, “Valuation is compelling (only semis below its 3-yr median forward PE) at 6x CY22E EV/S, ~50% discount to SPX Infotech growth peers.”
Risks: “1) Sharp correction in share price following strong rally to-date, 2) Strong competition from larger names, 3) Lumpy nature of consumer and enterprise spending that could create delays in acceptance and success of new products, 4) Reliance on multiple outsourced manufacturing partners, 5) Maturity of current game console cycle.”
Broadcom now at $470 given a price target of $580.
“AVGO exposure to data center/cloud and 5G should drive a 10%+ sales/EPS CAGR through CY23 along with a leading margin profile (75%/55% GM/OpM, near 50%+ FCF) helping maintain a 3%+ div yield (best in semis, which could grow 10%+ annually),” says BoA, “post div payments, we see FCF (~50% of total) being utilized to enhance shareholder value via buybacks. Investor concerns pertaining to software assets limiting growth are overstated in our view and see value in AVGO trading at 17x CY22E P/E (vs SOX trading at 21x).”
Risks: “1) Semiconductor cycle risks including sensitivity to US/China trade relations, 2) High exposure to Apple with potential design out risks, 3) Competitive risks in networking, smartphone, storage, enterprise software markets, 4) Frequent acquirer of assets which increases financial and integration risks, and 5) Recent strategy towards moving into non-core software businesses creates misexecution risks.”
Teradyne now at $130 given a price target $155
“TER’s leadership in the test market exposes the firm to trends driving upside across semicap peers, yet the stock has underperformed major WFE vendors by 3000bps YTD (semicap players up= +42% on avg). Furthermore, cons CY22E expectations (sales +5% YoY) is conservative, with WFE spend (leading indicator for test market) projected to be up +30%/+14% YoY in ’21/’22E,” says BoA, “we see TER as well-levered to AAPL insourcing (TER top tester with 25% sales exposure, benefits from Mac mix shift and future AR/VR/auto products), and a unique franchise in collaborative robots, a market with 25-30% annual growth potential.”
Risks: “(1) cyclicality and/or share losses in the core semiconductor test market, and (2) increasing competition in the robotics segment.”
ADI now at $170 given price target of $200
“Our management meeting highlighted (1) ADI’s improving auto portfolio, with legacy headwinds over and 30%+ of portfolio exposed to growth opportunities including wireless BMS (50%-100%+ higher content vs wired) and infotainment, (2) solid 5G exposure with US/European markets likely offsetting China weakness (now <25% of 5G sales), and (3) an industrial portfolio (50%+ of sales) bolstered by high growth trends (EV infra, healthcare, etc.),” says BoA, “Cons ADI topline outlook of +7% YoY for CY22 could be too low, as constraints could extend upside for cyclicals.”
Risks: “1) Economic downturn can reduce demand for automotive, industrial products. 2) Inability to realize the planned cost synergies with Linear Tech. 3) Higher than historical debt leverage could limit valuation multiples and increase risks in a cyclical downturn. 4) Customer concentration, with Apple contributing 10% of sales on an average and much higher during seasonally stronger quarters. 5) Competition from larger vendors such as TXN which have lower-cost production facilities.”
Qorvo now at $193 given price target of $215.
“Driven by operators, we see robust 5G handset adoption with units up 100%+/40%+ in CY21/22E to 600mn/860mn. QRVO is a key beneficiary, with strong share across OVX vendors whose 5G mix is lower than Apple (~40% of sales vs Apple 70%+), which should de-risk comps,” says BoA, “notably, CY22 cons view of QRVO mobile sales (+2% YoY) is low as mix/unit growth improves. QRVO also holds 5G base stations exposure, a market that should accelerate in 2H21.”
Risks: “1) Potential share losses in handset power amplifiers (PAs) where product cycles are short (6-12 months) resulting in changes in power amplifier selection by key customers, 2) Customer concentration at Apple and Samsung, 3) Gross margin headwinds associated with lower factory utilization due to weaker design win momentum, 4) Weaker smartphone growth trajectory, and 5) Semiconductor cyclicality driven by strong macroeconomic conditions and/or supply chain expansion, 6) COVID-19 headwinds further impacting supply chain or creating demand destruction.
Upside risks to our price target are: 1) higher RF content growth in new smartphones more than offsets quarterly unit volatility in Q4, 2) M&A that diversifies the business away from mobile and adds more long life cycle business, and 3) substantial share gain against peers in smartphone driven by higher R&D spend.”