Skyworks, Broadcom and Micron Look Cheap at Current Levels

 | May 18, 2018 | 5:00 PM EDT
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Stock quotes in this article:

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avgo

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qrvo

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mu

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AMAT

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FB

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Though they aren't completely without risk, considering how cyclical the industry they operate in has been over the years, a lot of chip stocks look reasonably priced even if business conditions soften a bit. That is, even if growth moderates and some firms get hit by an inventory correction, valuations are often low enough to warrant a close look by investors, provided one is confident that the bottom won't fall out for industry demand.

And there are still quite a few reasons to have such confidence. While soft smartphone, PC and telecom equipment demand remain headwinds, secular trends such as automotive chip growth, rising cloud data center capital spending and IoT device growth don't show any signs of withering. And even in markets such as smartphones and PCs, weak unit demand is being partly offset by trends such as higher memory and radio frequency (RF) chip content within phones and strong demand for gaming PCs that sport more powerful CPUs and GPUs than the average system.

Here are a few chipmakers that valuation-conscious investors might want to take a look at.

Skyworks

Valuation:

Skyworks Solutions  (SWKS) , one of the world's largest RF chipmakers, sports an enterprise value (market cap minus net cash) of $16.1 billion. That's equal to less than 13 times expected fiscal 2019 (ends in Sep. 2019) free cash flow (FCF) of $1.28 billion.

Why It's Cheap:

Like various other mobile chipmakers, softer-than-expected smartphone demand has weighed on Skyworks. There could also be some concerns about the traction Qualcomm  (QCOM) is beginning to see for its RF products.

Reasons to Be Bullish:

  • The dollar value of the RF chip content found within phones keeps rising one year after the next, thanks to the need to support more advanced mobile radio standards as well as a larger number of frequency bands. The arrival of 5G phones is set to strengthen this trend in the coming years. Multiple firms should prosper along the way.
  • Skyworks has been gaining share in China, as larger smartphone OEMs that it has strong exposure to grab share from smaller players that it has less exposure to. The company has talked up the Chinese design win momentum it has seen for its SkyOne RF front-end modules.
  • Strong automotive and IoT chip demand has been a tailwind, and should remain one in the coming years. Skyworks's "broad markets" sales, which cover a variety of non-phone products, rose 18% in fiscal 2017 and now account for over a quarter of its revenue. 5G network rollouts should give this business an additional boost in a couple of years.
  • A new $1 billion stock buyback plan (good for repurchasing over 5% of shares at current levels) was launched in February.

Broadcom

Valuation:

Broadcom (AVGO)  has an enterprise value of $111.2 billion. That's equal to less than 13 times a fiscal 2019 (ends in Oct. 2019) FCF consensus estimate of $8.68 billion.

Why It's Cheap:

Softer-than-expected iPhone unit volumes have pressured shares (Apple (AAPL) is easily Broadcom's largest mobile client). Sluggish set-top and broadband chip sales might also be a concern. In addition, Broadcom shares were hit earlier this year that it will lose some RF share to Qorvo (QRVO)  with this year's iPhone launches.

Reasons to Be Bullish:

  • In spite of the 2018 setback, Broadcom suggests it's confident it will see double-digit annual iPhone RF content growth over the next three-to-five years. The company's status as the world's biggest maker of FBAR filters (needed in larger and larger quantities in high-end phones as RF complexity grows) helps its cause.
  • Sales of Broadcom products used within cloud data centers -- everything from Ethernet switching and controller chips, to storage controllers and connectivity products, to custom ASICs used for AI work -- have been growing rapidly as cloud giants such as Alphabet/Google (GOOGL) , Facebook (FB) , Amazon (AMZN) and Alibaba (BABA) rapidly grow their capital spending.
  • In April, Broadcom launched a $12 billion stock buyback plan. It's good for repurchasing 12% of outstanding shares at current levels, and should both boost EPS and help prop up the shares.
  • In the wake of the Trump Administration's squashing of its hostile bid for Qualcomm, Broadcom has signaled it's open to making additional acquisitions, albeit smaller ones. Given management's track record to date at making acquisitions pay off, there's every reason to think that the same will hold for any future deals it inks.

Micron

Valuation:

Micron Technology  (MU) , a top-3 DRAM maker and also a major supplier of NAND flash memory, has an enterprise value of $63.8 billion. That's equal to just 7 times a fiscal 2019 (ends in Aug. 2019) FCF consensus estimate of $8.78 billion.

Why It's Cheap:

Both the DRAM and NAND markets have a long history of vicious boom-bust cycles, and that's produced a fair amount of concern that's Micron's earnings and FCF won't stay near their current levels for long. Adding to the concerns: NAND prices have softened a bit lately, and DRAM capital spending has picked up some.

Reasons to Be Bullish:

  • Micron gets about 80% of its gross profit from DRAM -- a market that has largely consolidated around Micron, Samsung and SK Hynix. And these three companies seem intent on avoiding the types of brutal downturns seen in the past by controlling supply growth. Comments from both the DRAM makers and others suggest industry bit supply growth will only be around 20% this year (a level low enough to be soaked up by demand growth) in spite of higher capex.
  • While NAND conditions don't look as great -- the market is more competitive, and supply growth is much higher -- recent reports suggest 2018 price pressure might not be as bad as feared, due to strong solid-state drive (SSD) demand and slower-than-expected ramps for newer high-density 3D NAND chips.
  • Server DRAM demand remains very strong: On its Thursday earnings call, Applied Materials  (AMAT) suggested servers could overtake mobile devices as the largest DRAM end-market in three-to-five years. Strong cloud capex is helping, as is broader uptake for memory-intensive AI and analytics workloads.
  • Automotive and graphics DRAM demand has also been pretty strong. And while mobile DRAM sales have been hurt by weak smartphone demand, they've gotten a lift from steady growth in the amount of DRAM found in the average phone.
  • Micron's improved balance sheet and low multiples leave it well-positioned to launch a large and highly accretive stock buyback. An announcement could arrive during the company's May 21 analyst day event.

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