The Nasdaq Composite Index touched a 15-year high of 5056.06 on Thursday. It is broadly believed that the strong results from tech companies were largely responsible. In fact, the tech sector has had one of the best stock-price responses to Q1 earnings announcements – the 5th best among the 16 Zacks sectors in the S&P 500 Index.
The Dark Horse of the Tech Sector
The semiconductor industry is one of the best-performing spaces within the tech sector at the moment. However, it is often overlooked as hot stocks in the social media or cloud computing space grab the headlines.
But semiconductor stocks can be compelling investments too. These companies often form the backbone of the technology world and are part of an industry that posted sales of $340.3 billion in 2014, up 7.9% from $315.4 billion posted in 2013. The semiconductor industry was one of the top performing industries in 2014.
The growth was fueled by a stabilization in the PC market, continued strong adoption of tablets and smartphones as well as automotive electronics and frequent updates in the new category of wearable devices.
Gartner expects worldwide semiconductor revenues to reach $358 billion in 2015, a 5.4% increase from 2014.
Bumps on the Race Course
While the factors seem in favor of the industry, things might not go as expected. The recent first quarter earnings reports bear testimony to the fact.
A number of chipmakers have provided a soft guidance for the second quarter. The outlook created a stir in the semiconductor market with steep declines in share prices. This has put investors in a dilemma about whether to hold on to the stocks or to sell them.
The recent concerns stem from issues related to corporate fundamentals, softening enterprise demand, a strong dollar and Fed policy uncertainty.
The dollar has risen about 23% against a basket of major currencies in the past year and the situation may not change for the rest of the year as well. The latest reports form Gartner and IDC reveal that total PC shipments further declined in the first quarter of 2015, indicating that smartphones continue to steal PC dollar spend. As per data provided by Gartner, PC shipments contracted 5.2% on a year-over-year basis to 71.7 million units in the first quarter of 2015.
All is not lost, though. There are still some overlooked companies in the space that are somewhat buffered from the industry weakness, and have impressive growth drivers.
We have three semiconductor picks, which will take investors on a smooth road:
The 3 Underdogs
Cypress Semiconductor Corporation (NASDAQ:CY) is a developer and manufacturer of a broad range of digital and mixed signal ICs. It sports a Zacks Rank #1 (Strong Buy). The company’s advanced technology, momentum in new products, and increased customer wins will continue to drive growth.
Also, its merger with Spansion is expected to create a global provider of microcontrollers and specialized memory chips for embedded systems and generate more than $2 billion in annual revenues. Also, Cypress’ entry into the wearables market with its TrueTouch controllers is a major achievement. The use of its TrueTouch controllers in Qualcomm (NASDAQ:QCOM) and Sony Corp Ord's (NYSE:SNE) smartwatches are likely to boost the company’s revenues.
Cypress has generated a return of 33.2% over the last 52 weeks. The company has a long-term expected earnings growth rate of 13.4%. It has delivered positive earnings surprises in the last four quarters with an average surprise of 83.2%.
We expect this trend to continue when it reports its first-quarter 2015 earnings on Apr 30.
Broadcom Corp (NASDAQ:BRCM), a Zacks Rank #1 stock, provides semiconductor solutions for wired and wireless communications. Broadcom provides a portfolio of system-on-a-chip (SoC) and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices.
It has generated a strong 52-week return of around 46.4%. The company has a long-term expected earnings growth rate of 11.5%. It has delivered positive earnings surprises in the last four quarters with an average surprise of 9.2%.
Moreover, it reported strong first-quarter 2015 results with both the top and bottom lines beating the Zacks Consensus Estimate.
NVIDIA Corp (NASDAQ:NVDA) is a worldwide leader in visual computing technologies and the inventor of the graphic processing unit or GPU. It sports a Zacks Rank #1. The company should benefit from the increased adoption of its Tegra K1 processor, which should act as a catalyst, going forward.
Also, growth in GeForce GPUs and strength in gaming, data center, cloud and automotive platforms are encouraging. NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs remain its strengths.
NVIDIA has generated a return of 19.0% over the last 52 weeks. The company has a long-term expected earnings growth rate of 10.3%. It has delivered positive earnings surprises in the last four quarters with an average surprise of 29.1%.
NVIDIA’s fiscal fourth quarter 2015 earnings and revenues exceeded the Zacks Consensus Estimate. The results were helped by an increase in the sale of auto infotainment systems, mobile devices and SHIELD tablets.
The Bottom Line
Looking at the strong growth fundamentals of these companies, we expect them to emerge as winners.