Semiconductor stocks have taken a savage beating in the past month. After their powerful rally in 2019, concerns that chip demand will collapse as the global economy slips into a recession have sent chipmakers' stocks tumbling along with the rest of the market.
The Philadelphia Semiconductor Index, which includes some of the world’s largest chipmakers, is down more than 18% in 1Q, capping its biggest quarterly loss since 2011. But if you dig a little deeper, the environment isn’t that bad for all chipmakers.
Some producers are faring better than others in this downturn due to their strong balance sheets, product diversification and new demand dynamics. Below, is a short-list of three such names that fall into this category.
1. Nvidia
After soaring 76% in 2019, shares of Nvidia Corporation (NASDAQ:NVDA) are withstanding the current sell-off much better than its peers. Its stock is up more than 12% this year, hugely outperforming the Philadelphia Semiconductor Index. It closed yesterday at $263.60, remaining among the top 10 gainers on the S&P 500.
While the chipmaker is unlikely to escape the demand slowdown due to COVID-19 closures, analysts are focusing on the company’s balance sheet, cash flow, and product categories that are expected to remain strong in the current environment.
Nvidia was one of Morgan Stanley's top ideas in the semiconductor space. “For larger cap growth with the best chance of powering through tough conditions, we favor Nvidia,” wrote Analyst Joseph Moore in a note last month.
Last week, Needham upgraded the stock to buy, forecasting higher demand for chips used in medical applications, as well as for artificial intelligence technologies.
Susquehanna Financial Group raised its Nvidia price target yesterday by $10 to $330, saying that “enterprise demand remains strong and supply constraints have (basically) been alleviated,” while the remote-work trend is “helping overall demand” for cloud-computing chips.
The firm reiterated its positive view on the stock, but cautioned that Nvidia was in “a holding pattern” with respect to the timing of the company's next-gen 7nm Ampere graphics card product launches due to the coronavirus outbreak.
2. Advanced Micro Devices
Advanced Micro Devices (NASDAQ:AMD) is another chip stock which is well positioned to perform once the economy is back in motion. Northland Capital Markets upgraded AMD last month to ‘outperform,’ saying it was a “company to own post-crisis.”
“A shift in consumer behavior may benefit game console sales in the second-half and we note solid demand in the data center market,” their note said, assigning a $52.50 price target to AMD stock, which is almost unchanged in the past quarter. Shares closed at $45.48 yesterday. The chipmaker was the best performer on the S&P 500 Index in 2019.
The stock was also upgraded to “overweight” from “neutral” by an analyst at Piper Sandler who noted the broader market’s recent pullback “provides an attractive opportunity for long-term investors” who want to buy into the stock.
Speaking at an investor conference early this month, Chief Executive Officer Lisa Su tried to allay investor concerns about the coronavirus' impact on the company’s profitability, saying the computer industry’s supply chain is rapidly recovering to typical levels of activity. AMD’s suppliers in China, Taiwan and Malaysia are almost back to full output.
AMD maintained its near-term revenue forecast of $1.8 billion, plus or minus $50 million, for the first three months of its fiscal year. While results may be at the lower end of that range and business from consumers in China has weakened, orders elsewhere are in line with expectations, helped by demand for data center chips, according to Su.
3. Micron Technology
Micron Technology (NASDAQ:MU) surprised investors last week when it reported adjusted earnings that beat Street estimates by 24%. the company also predicted stronger-than-expected revenue even during a period when major economies are likely to slip into a recession.
Micron’s second-quarter revenue of $4.8 billion was down 18% from a year earlier but in line with the high end of the company’s forecast. Micron also projected revenue in the range of $4.6 billion to $5.2 billion for the May quarter, the midpoint of which was slightly higher than Wall Street’s projection.
What’s helping Micron is strong demand from data-center operators and increasing purchases of laptops as millions of employees and students stay at home. Analysts at Bank of America upgraded Micron to buy from underperform, saying it sees new growth opportunities for the company after the coronavirus crisis passes.
Micron shares declined about 22% in the first-quarter, closing at $42.06 yesterday after falling more than 5%.
Bottom Line
After a brutal first quarter, these 3 chip stocks are well-positioned to outperform once the virus outbreak is contained and investors again start focusing on company fundamentals.