Chip stocks continue to climb Thursday after starting to take off Wednesday, boosted partly by better-than-expected earnings and also by hopes that M&A is alive and well in a consolidating market. Yet the brightest stars in the semiconductor firmament may be suppliers to the telecom sector.
Of the latter, Avago Technologies (AVGO - Get Report) and NXP Semiconductors (NXPI - Get Report) climbed up as much as 6% Wednesday, with Xilinx (XLNX - Get Report) starting its rally after hours and continuing to fly 9% Thursday morning. NXP climbed up about 2% Thursday while Avago is more muted, up 0.6%.
Among other semiconductors with telecom exposure, Qorvo (QRVO - Get Report) , Analog Devices (ADI - Get Report) and Cirrus Logic (CRUS - Get Report) have bounced back after lowering their earnings guidance and subsequently seeing their shares fall.
One potential fly in the ointment here is they all supply chips to Apple (AAPL - Get Report) . Whether their shares' bounce-back suggests that iPhone sales will be stronger than skeptics expect is an open question.
(Apple is a holding in Jim Cramer's Action Alerts PLUS portfolio.)
"There's definitely concerns about Apple's supply chain," said Dan Amir, managing director of equity research at Ladenburg Thalmann Financial Services, adding that it will be a theme throughout the tech giant's earnings season for chipmakers with exposure to Apple. (Apple is reporting earnings Jan. 26.)
Qorvo and Analog Devices are about 2% higher, but Cirrus Logic is still trading down about 0.5% Thursday morning.
There's less of a concern about semiconductor companies serving the broader telecommunication end markets, such as data centers and cloud networking, Amir observed. But that distinction may be lost on investors, at least at the moment.
"I think the market is definitely taking a brush on everything to be negative, and the reality is that things are not so negative in the semiconductor world," he said.
But he noted that there is a combination of factors driving the movement of semi stocks, particularly those serving the telecom end market.
One, better-than-feared earnings of Linear Technology (LLTC) and Xilinx have given their peers a lift. Yet another driver is the belief that consolidation is still alive and well, Amir added.
Among other telecom suppliers, Microchip Technology (MCHP - Get Report) agreed to purchase Atmel (ATML) Tuesday after the markets closed while Bloomberg reported Wednesday that Synaptics (SYNA - Get Report) was in deal talks with Chinese investors.
(Atmel is a holding in David Peltier's Stocks Under $10 portfolio.)
Ian Ing, executive director of MKM Partners, wrote in an analyst note Thursday morning that the positive stock reaction is likely driven more by "additional 'smoke' as a potential M&A target" than by its earnings. The San Jose, Calif.-based company reported third-quarter earnings Wednesday after the markets closed, posting earnings per share in line with expectations and record revenue for new products.
"We continue to think fabless companies are ripe for consolidation as scale matters more than specialization," he asserted, suggesting that a bid for Xilinx by Qualcomm would make sense, as it would bolster the latter's mobile infrastructure offerings.
Qualcomm, which concluded a strategic review last month following pressure from Jana Partners and decided to stay independent, hasn't sealed sizable deals in the ongoing consolidation wave among chipmakers.
Ing further observed that change in control agreements and a lack of an annually scheduled March analyst day also adds more to acquisition hopes for investors.
Semiconductor companies enjoyed a record year on the M&A front as chipmakers saw revenue growth slow and turned to acquisitions. Bidding wars escalated, too, as players in the market feared missing out on assets.
According to Dealogic, there were 377 semiconductor transactions in 2015 with a total deal value of $137.8 billion. Of those, 68 involved U.S.-based targets, which had a total value of $98.4 billion.
Avago Technologies' (AVGO - Get Report) $37 billion purchase of Broadcom, NXP Semiconductors NV's (NXPI - Get Report) $16.7 billion buy of Freescale Semiconductor and Intel's $15.7 billion acquisition of Altera were among the largest transactions last year.
It will be another "intense year of M&A" for chipmakers in 2016, B. Riley & Co. analyst Craig Ellis wrote in a recent note, asserting that there is still a long list of targets even after 2015.