After a tough 2018, chip stocks are back with a vengeance this year, boosted primarily by an uptick in the data center segment. Adding to the buoyancy is demand from new technologies and a host of emerging trends such as 5G wireless, artificial intelligence, self-driving cars and the Internet of Things.
The two semiconductor sector ETFs, VanEck Vectors Semiconductor Fund (NYSE:SMH) and the iShares Philadelphia Semiconductor Index ETF (SOX), are up 21.7% and 20.5% respectively, both significantly outperforming the broader market.
While sector heavyweights such as Intel (NASDAQ:INTC), NVIDIA (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), Texas Instruments (NASDAQ:TXN) and Qualcomm (NASDAQ:QCOM) garner most of the attention from investors, there are a number of below-the-radar stocks connected to the sector whose shares have seen breathtaking growth over the past year. Here are three we believe could provide some of the best long-term gains given their dominant position in the cybersecurity arena.
1. Xilinx
Programmable chipmaker Xilinx (NASDAQ:XLNX), which develops various types of integrated circuits, is up 68.4% year-to-date. It closed at $126.31 last night, not far from its all-time high of $127.81 reached on Mar. 20.
The San Jose, Calif.-based company is benefiting from healthy sales of chips for data centers and 5G wireless networks. Those networks—up to 100 times faster than existing ones—will generate billions of dollars for gear and chips.
"The start of this ramp [up of 5G spending] is happening faster than we had thought," Xilinx Chief Executive Victor Peng said on the company's quarterly earnings call on Jan. 23. "And the strength for coming out of the gate is pretty strong."
Xilinx has also seen robust demand for its other 5G products, such as a one-chip combination of analog radio chips and digital processors that aim to replace several components produced by the likes of Analog Devices (NASDAQ:ADI) and Texas Instruments.
"This integration should make Xilinx’s design wins more sticky," said Tristan Gerra, a senior research analyst with RW Baird. "We think Xilinx will continue to see design win activity for 5G in multiple years ahead."
2. Lattice Semiconductor
Oregon-based Lattice Semiconductor (NASDAQ:LSCC) manufactures high-performance programmable logic devices. The company is ranked number three in global market share of field programmable gate array (FPGA) devices.
Shares of Lattice Semiconductor, which closed at $12.65 on Wednesday, have more than doubled over the last year, gaining 108%. The stock hit a 15-year high of $13.17 on Mar. 11. Shares of the chipmaker have been on a tear since the the company's fourth quarter report on Feb. 12 delivered impressive earnings growth and revenue that was significantly better than market expectations, led by growth in communications and computing.
For the first quarter of 2019, Lattice expects revenue between $94 million and $98 million, ahead of the consensus analyst estimate of $93.7 million. "Despite uncertainty in the current macroeconomic climate," said Jim Anderson, the company's chief executive, "we are positioned to benefit over the long term from multiple catalysts in our business, including growth in computing, industrial and automotive, and the global 5G buildout."
3. KLA-Tencor
KLA-Tencor Corporation (NASDAQ:KLAC) is a global capital equipment company based in Milpitas, California. It supplies process control and yield management systems for the semiconductor industry and other related nanoelectronics industries.
Shares, which have rallied 34% since the start of the year, ended at $119.93 yesterday, ascending back toward the record peak of $122.40 the stock reached in July 2018. According to JPMorgan analyst Harlan Sur, the big rally in KLA-Tencor stock so far this year is just getting started. He's upgraded his rating on the stock to Overweight from a “not rated” designation, citing its strong competitive position in several chip equipment areas.
“With leadership franchises across semiconductor (process control and specialty semi end-markets), PCB [printed circuit board] and display, we expect KLAC to outperform relative to peers and the broader market,” he wrote in a note on Mar. 7. “Despite a strong performance YTD, we continue to expect significant upside from here and recommend accumulating shares.” Sur's December 2019 price target for KLA-Tencor is $160, which would represent about a 25% upside by year-end.
He credits the company’s industry-leading profitability metrics of more than 60% gross profit margins and higher than 35% operating profit margins for his call. As well, he adds, the chip equipment maker has exposure to some of the hottest future technology trends, including 5G smartphones, 5G infrastructure equipment, autonomous driving sensors, and cloud-computing hardware. For that reason, he predicts KLA-Tencor could grow its earnings per share by 15% to 20% annually over the next three years.