Real Money's Brad Ginesin is taking a hard look at semiconductor stocks. What he’s seeing goes against the grain with traditional Wall Street orthodoxy – boom and bust cycles may not be a factor with chip stocks.
“When it comes to semiconductor capital equipment the cyclical boom and bust cycles may be a thing of the past," Ginesin wrote recently on Real Money Pro. "The companies that provide the machinery to manufacture ever more sophisticated circuitry in chips are now growth stocks rather than the traditionally perceived cyclicals of the past."
Ginesin cited a decidedly bullish analysis by Jefferies that identified a "tectonic shift to growth plus expanding P/E" for the group. The investment firm initiated "buy" recommendations with price targets 20-25% above the current market for KLA KLA, Lam Research LRCX, and Applied Materials AMAT.
“Jefferies posits that the old cyclical semi-cap equipment cycle that has occurred since the 1990s ended in 2015,” Ginesin noted. “Since this inflection point in 2015, the industry has compounded at 12% through 2020; now it's set to grow even faster with visibility out to 2025.”
Additionally, the stock valuation of the industry leaders lags the market multiple by 10%. “Jefferies asserts that the opportunity is for the earnings to grow faster than Wall Street currently expects, along with higher multiples reached as a growth multiple overtakes a cyclical one,” Ginesin added.
Moreover, the semiconductor sector is critical to the manufacturing sector and is powering a technology revolution. “Computing power is at the heart of autonomous driving, cloud computing data centers, and the metaverse,” Ginesin said. “Governments are funding incentives and subsidies for semiconductor fabrication, eager to ensure supply control over the building blocks of this technology.”
There’s more. Supply constraints have led to a push out in demand for capital equipment in 2021 and the shortage of chips will extend well into this year. “This gives Wall Street confidence in a robust year ahead,” he added.
What to buy? Ginesin cites three semi-cap equipment makers -- KLAC, LRCX, and AMAT right now. “All can be bought on tech weakness with confidence that business visibility is high, demand is robust, and valuations are reasonable,” he said.