If you are looking for compelling investing opportunities right now, it's worth taking a closer look at the semiconductor space.
Fears of a cyclical downturn have kept chip stock valuations under wraps, but the Street is convinced that these concerns are unfairly exaggerated. If you follow this line of thinking then chip stocks look very appealing right now.
We used TipRanks' data to zero in on three of the strongest semiconductor stocks with big upside potential. All three stocks below have a 'Strong Buy' analyst consensus rating, based only on ratings from the last three months.
Shares in chipmaker Micron (MU) have surged this week. Micron surprised the market by announced a $10 billion share buyback and an encouraging flash memory deal with Intel (INTC) . Earlier in the week, the chipmaker increased its financial guidance for its fiscal third quarter. "Our third quarter results are driven by focused execution of our strategy against a backdrop of healthy industry fundamentals," CEO Sanjay Mehrotra said. Micron now expects sales for the third quarter of $7.7 billion to $7.8 billion (up from $7.2 billion to $7.6 billion). Similarly, earnings are now guided at $3.12 to $3.16 a share vs. the previous estimate of $2.76 to $2.90.
"Micron offers a unique way for investors to gain exposure to DRAM and NAND markets at what we view as attractive valuations," commented RBC Capital Markets Amit Daryanani. He sees big upside potential for Micron of 44%. That would take shares to an impressive $80 from just $55 currently. Bear in mind, prices are already up 35% year-to-date. And on a one-year basis, shares have almost doubled. This makes Micron one of the best-performing shares in the market right now.
Luckily, the good times are set to continue. According to Daryanani, Wall Street seems to be "missing" a few key factors.
First apprehensions about a demand downcycle are- to put it bluntly- "overblown." After all, "unless this is comparable to the Great Recession (2006-09), there could be upside to Micron stock," the analyst asserts. He explains "We think the DRAM and perhaps even the NAND industries are structurally different going forward, driven by: a) enhanced capital intensity making bit capacity growth more modest and expensive; b) reduction in number of competitors (15 to 3 in last 20 years) making for sensible pricing environment; c) diversified DRAM user base; and d) potential for capital allocation over time."
Overall, our data suggests a strong bullish consensus backing this chip giant's market opportunity. Out of 23 analysts polled in the last three months, 19 are bullish on Micron's stock, three remain sidelined, while one is bearish on the stock. With a return potential of 34%, the stock's consensus target price stands at $74.23.
Analysts reiterate their stock recommendations quite a bit. So when a stock is upgraded, or more rarely, downgraded, the market takes note. And our data shows that this chip-equipment maker has just received a telling upgrade from Citigroup analyst Atif Malik. Malik also boosted his Lam Research (LRCX) price target from $220 to $245 (22% upside potential).
He sets out the reasoning behind his sentiment shift here: "We believe stable memory investments in 2019 can continue to drive strong top line growth for the company. While Lam Research has improved its foundry share over the last three years, memory sales are still ~75% on trailing 12-months basis." He notes that Lam's sales/earnings generally track strongly with overall memory investments historically. So an 11% / 8% growth in memory capex in 2018/19 should drive Lam Research's prices higher over the next 12 months.
With no less than 14 back-to-back buy ratings from the Street in just three months, Lam Research is primed to outperform. Indeed, the $275 average analyst price target translates into 38% upside potential from the current share price. Plus- in a big show of confidence- Lam Research recently raised its dividend 120% while declaring a $2 billion share buyback. The company now expects to return 50% plus of its free cash flow to shareholders.
Apple (AAPL) iPhone chip supplier Broadcom (AVGO) may be in a "murky environment" right now, but don't let that faze you. This is the advice from top-rated Morgan Stanley analyst Craig Hettenbach. He has just reiterated his 'Buy' rating on the stock with a bullish $320 price target. Given the current share price of $239, this indicates big upside potential of 34%. "We are digging in our heels on Broadcom at a time when it feels like sentiment can't get much worse," writes Hettenbach.
"The bad news is already out," he explains and Street estimates have already been properly reset. Most notably, Broadcom has experienced a drag on growth from a big shortfall in smartphones. This has led to weak demand for its wireless chips. But the June 7 earnings call offers "an opportunity for management to regain control of the narrative on the stock, following a very noisy and unpredictable six- to nine-month period that has weighed heavily on the shares."
Looking forward, Hettenbach sets out five key factors capable of pushing prices higher. Keep an eye out for the following: Broadcom confirming that the worst of the wireless cuts is over; investors gaining greater confidence that wireless has bottomed; progress towards operating margin targets; evidence of aggressive buybacks; and strong free cash flow growth- potentially leading to dividend increases.
Encouragingly, we can see that Broadcom has retained full support from the Street. In the last three months, 24 analysts have published buy ratings on the stock with only two analysts staying sidelined. Meanwhile the average analyst price target indicates 31% upside potential from current levels.