With markets in a take-no-prisoners mood towards tech stocks (or close to it), some chip developers and equipment makers are starting to look more appealing.
It wouldn't surprise me if tech sees more selling pressure before a bottom arrives. Many (though not all) growth stocks are still pretty expensive; both margin debt and ARK fund redemptions could drive a lot of forced selling; and Jerome Powell's Thursday remarks didn't do anything to calm investor nerves about inflation and bond yields.
But with the macro backdrop for the second half of 2021 still looking very good thanks to pending stimulus and reopenings, this is a good time to start creating a buy list. And for tech investors, chip stocks aren't a bad place to begin.
Against a backdrop of very strong demand that has led to shortages for graphics cards, automotive chips, notebook parts and much else, one chip developer after another has been sharing strong top-line numbers that would often be even stronger if not for supply constraints. Moreover, a number of these firms, including NXP Semiconductors (NXPI) , Microchip Technology (MCHP) , Nvidia (NVDA) and Marvell (MRVL) , have indicated they expect demand to exceed supply for much or all of 2021.
There is some risk that demand within certain chip end-markets, such as gaming hardware, notebooks and tablets, will cool off some amid reopenings, and that inventory corrections could eventually occur among customers who have been ordering aggressively due to shortages and stretched lead times. But the gradual addressing of all of the demand that's currently being unmet in some of these end-markets should help soften the blow (not to mention make a lot of gamers very happy).
On the flip side, demand within certain end-markets, such as smartphones, enterprise hardware and perhaps also cars, is likely to improve amid reopenings and the macro recovery that's likely to accompany them. And some end-markets, such as cloud data centers, look poised to remain strong.
Meanwhile, the demand backdrop for chip equipment makers arguably looks even stronger. Capital-intensity continues rising for leading-edge manufacturing processes; TSMC (TSM) and various other foundries are dialing up their capex as they deal with demand spikes (and quite often, shortages) both for leading-edge and trailing-edge process nodes; rising DRAM prices are set to become a tailwind for DRAM capex; and growing interest in both the U.S. and E.U. in localizing chip production.
With all that in mind, here are some chip developers and equipment makers that I think currently look intriguing, or are beginning to. As always, investors are advised to do their own research before taking positions in any of these companies.
1. Micron (MU) It hasn't sold off a ton so far, but it trades for less than 10 times a fiscal 2022 (ends in Aug. 2022) EPS consensus that looks beatable (and is comfortably below the company's EPS peak during the 2017/2018 memory boom cycle) given how DRAM demand and prices look set to trend this year. On Wednesday, Micron hiked its guidance for the second quarter in a row.
2. Western Digital (WDC) After falling over much of 2019, NAND prices are stabilizing and look poised to improve in the second half of 2021. That should be a tailwind for Western, as should strong demand for high-capacity hard drives among Internet/cloud giants (the proverbial hyperscalers). Following a Thursday tumble, shares go for a little under 10 times a fiscal 2022 (ends in June 2022) EPS consensus that could easily prove low.
3. Ultra Clean Holdings (UCTT) A chip manufacturing equipment maker that's trading for less than 13 times its 2021 EPS consensus. Sales rose 31% in 2020 and are forecast to be up 16% in 2021, not counting the impact of a pending $348 million deal to buy Israeli chip equipment maker Ham-Let.
4. Cohu (COHU) A chip test equipment that fell sharply this week as it carried out a 4.95 million-share stock offering. But it still only trades for around 14 times its 2021 EPS consensus. The testing needs of chips going into 5G phones is a tailwind for the company, as is the adoption of more advanced chip packaging technologies in a number of end-markets.
5. Marvell Technology (MRVL)
This one still isn't all that cheap -- it currently trades for 23 times its fiscal 2023 (ends in Jan. 2023) EPS consensus. But it probably deserves some kind of premium in light of its growth potential and execution, and is at least worth keeping an eye on following Thursday's post-earnings plunge. Among the growth drivers Marvell has in front of it: 5G infrastructure deployments (and share gains within the market), growing automotive networking chip needs, rising SSD penetration rates, growing cloud capex, and a slew of engagements with hyperscalers related to custom silicon work.
As an aside, I still also like Applied Materials (AMAT) and Synaptics (SYNA) , two chip industry names that I highlighted in a Dec. 24 article. However, it's worth keeping in mind that both companies rallied meaningfully in January and February, before paring their gains some this week.