6 Experts Ante Up With Chip Stocks

As the heart of computer processing, semiconductors underlie most of today's technology services and products. Global supply issues have challenged the sector recently, but most advisors continue to see a bright, long-term future for growth. Here, six contributing experts at MoneyShow.com review their top investment picks in the chip space. Jon Markman, Strategic Advantage Revenues are surging at Nvidia as its high-end chips for graphics and data centers remain in high demand. The San Jose, Calif.-based company reported revenues soared 68% during the second quarter, versus a year ago. And for good measure executives raised third-quarter guidance to $6.8 billion, $300 million above prior estimates. Shares are likely to trade much higher the remainder of 2021. It should not be a surprise business is booming. Nvidia is one of the best-run semiconductor companies in the world. Long ago Jensen Huang, chief executive officer, began moving the company all-in on artificial intelligence. It was the kind of big bet that could have sunk the business. At the time AI was more about theory than practical applications. The wager paid off. Today Nvidia has become an AI business. It runs an AI software platform called CUDA. Its chips for computer graphics use the software to render best-in-class graphics for gaming computers, workstations, super computers, data centers and even game consoles like the Nintendo Switch. However, the real engine of growth is future applications. AI researchers have only begun to scratch the surface of what is possible with hardware and software capable of processing tens of millions of simulations on a timely basis. That's the Nvidia value proposition. The valuation is hard for many investors to get their head around yet it is the product of Huang constantly putting Nvidia in the right place at the right time. Now the company is growing extremely fast as AI goes mainstream. Gaming sales surged to $3.1 billion in Q2, up 87% year-over-year. Compute and Network sales, which includes data centers, bounced 46% higher over the same time frame to $2.6 billion. Longer-term investors should buy shares into weakness. Nate Pile, Nate's Notes Though it can be mentally difficult to buy stocks when they trade near all-time highs, the chip sector is performing very well these days, and so is Lattice Semiconductor ; consequently, I have decided to add a bit more exposure to the chip space. Lattice makes very low power programmable logic devices (i.e. chips) that are used in a wide variety of applications ranging from drones to cell towers to automotive applications to smart appliances (to name just a few). Not surprisingly, given the rate at which semiconductors are being incorporated into just about everything that is being produced for consumers these days, Lattice has been doing well as a company lately (and, not surprisingly, so has its stock!). To be sure, the bull market for chip stocks could end now, but with the fundamentals for the sector looking quite solid now -- and the trend for most stocks in the sector clearly being up at the moment -- I am excited to be adding Lattice to the basket of chip stocks we currently own. With a reminder to plan on building a position over a period of several months rather than all at once, LSCC is a strong buy under $55 and a buy under $65. Richard Moroney, Upside Stocks In a crowded field of more than 50 semiconductor stocks that we cover in our proprietary Quadrix ranking system, SMART Global stands tall. A leading designer and maker of electronics focused on memory and computing, the company serves more than 800 customers, including Samsung -- the largest at 17% of sales in fiscal 2020 ended August. SMART Global is the largest manufacturer of memory used in PCs, servers, and smartphones in Brazil, where the company generated 35% of revenue last year. Buoyed by market-share gains and improve profit margins, SMART Global is positioned for outstanding growth. Per-share earnings are projected to advance 79% in 2021 and 23% next year. For the August quarter, the consensus calls for per-share earnings of $1.60, up 95%. Yet, shares seem unduly cheap at a recent 10 times projected current-year earnings. SMART Global is being started as a Buy. John Buckingham, The Prudent Speculator Lam Research is a manufacturer and designer of semiconductor processing equipment used in the making of integrated circuits. The company's sales are weighted towards memory manufacturers (which can create big swings in the stock price), while smaller portions of total revenue come from silicon foundries and integrated device manufacturers. Lam posted fiscal Q4 EPS of $8.09 that beat expectations of $7.53, while revenue of $4.15 billion also came in ahead of the consensus. The highest in Lam's history, revenue was driven by a surge in wafer fabrication equipment spending (management expects the spending to be sustainable), rising device manufacturing complexity and NAND business strength. CFO Doug Bettinger believes that Lam's supply chain may encounter additional headwinds in the September quarter, but noted that customer demand remains strong and long-term goals are on track. LRCX paid down $800 million of senior notes last fiscal year, and has nearly $6 billion of cash on hand to offset $5 billion of debt. Analysts expect a significant jump in EPS this year and 8% growth or better through 2024. The chip-making equipment industry historically has been notoriously cyclical, but we think the current upswing has several more years at least to run. Mike Cintolo, Cabot Top Ten Trader Semiconductors remain a high-growth business, with the global industry seen expanding 12% a year in the middle of what researcher IDC says is a super cycle of demand, thanks to the Internet of Things and electrification. But that doesn't mean all chips are created equal. ON Semiconductor makes thousands of circuits, many of which have been fab fillers, selling into products that tend to surge and decline with the economic cycle. But new CEO Hassane El-Khoury took over in December (leaving Cypress Semiconductor) with a focus on shifting ON toward higher-margin pieces that should see steadily rising demand, such as those for autonomous and electric vehicles and renewable energy. The early signs of the strategy are promising: As the firm shifted capacity into making more profitable chips, ON's second quarter sales grew 38% year over year. That included a 69% jump in sales to automakers, who feature an increasing number of computing-heavy features in their models, from blind-spot sensors to big driver displays. Revenue for Q3 should be more than $1.6 billion, a 23% gain, with EPS of 67 cents (more than double a year ago). Even better, after the Q2 report, the top brass hosted a bullish Analyst Day, saying it expects margins to surge over the next four years with free cash flow likely to reach $2 billion annually by 2025. The firm's Q2 report and Analyst Day launched ON to new highs. We're OK starting a position here with a tight stop. Angelo Zino, CFRA Research's The Outlook Broadcom carries our highest investment recommendation of 5-STARS, or Strong Buy. The firm is a leading designer, developer, and global supplier of a broad range of analog semiconductor devices, with a focus on radio frequency, or RF. Our recommendation reflects our views about valuation and attractive growth prospects over the next 12 months. We expect AVGO to benefit from favorable trends in the data center space as well as a new iPhone cycle in the second half of the calendar year. We also think robust free cash flow generation will allow AVGO to significantly return cash to shareholders. We see upside in AVGO given our view of attractive valuation and potential earnings/free cash flow leverage. We are encouraged by AVGO's increasing shift to its higher-margin infrastructure software business, which is more recurring and offers diversity from semiconductors. AVGO will likely benefit from improving networking demand for its switching and routing platforms as well as for its custom ASIC solutions in cloud, in our view. We have high confidence in management execution and expect AVGO to benefit from higher spending from cloud customers and telecom providers that are looking to upgrade their infrastructure and networks. We think end-market visibility remains extremely high through the rest of the calendar year across all core end markets. We believe the firm's broadband business is going through a resurgence (18% of semiconductor sales), as the work, learn, and play from home environment is driving global service providers to expand connectivity to the home. We also view AVGO's 3% plus yield as among the most attractive and sustainable within the semiconductor industry.

6 Experts Ante Up With Chip Stocks

Contributors discuss their top investment picks in the semiconductor space.

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