The semiconductor industry’s lackluster performance since late 2018 could turn around soon. The chip-making industry is primarily boosted by an uptick in data center segment, the reviving demand for chips and a possible U.S.-China trade deal.
Industry Stages Rebound in 2019
Semiconductor stocks powered the equity markets until last fall, largely driven by chip-making giants such as Nvidia NVDA. But the industry soon plummeted, dragged down by trade tensions and China’s economic slowdown.
Although some segments of the industry are witnessing growth, many others encountered a decline in sales late last year. However, the industry is already witnessing a revival this year. The iShares PHLX Semiconductor Index has gained 17.3% year to date.
Nvidia and Apple Lead the Rebound
This recovery is being largely propelled by positive news from Nvidia and Apple AAPL. Earlier this week, Nvidia announced its decision to acquire Israeli chipmaker Mellanox Technologies (MLNX) for $6.8 billion in a bid to expand its data center business. Nvidia aims to enhance its reach in networking and connectivity on the back of its customized solutions and Mellalox’s know-how.
Also, Apple’s stock was upgraded to “buy” from “neutral” by Bank of America BAC earlier this week, raising the 12-month price target to $210 from $180. The bank attributed its decision to the prospect of upbeat comparable store sales in 2019, a potential U.S.-China trade agreement and prospects of a huge buyback authorization in April.
The bank also recently cited several risks that the sector faces. However, the iPhone maker’s price performance has witnessed an upward movement after suffering terribly in the fourth quarter. The company’s shares have outperformed the broader S&P 500 Index (16.4% vs 12.2%) on a year-to-date basis.
Semiconductor Industry Rebound Forecasts
Apart from the macroeconomic factors involved, the recent turbulence in the semiconductor industry is largely the result of its cyclical nature. It is notable that despite weak demand in late 2018, global chip sales increased 13.7% on a year-over-year basis to $468.8 billion last year, Semiconductor Industry Association reported. The 2018 sales figure happens to be the chip industry’s highest annual total yet.
In addition, RBC Capital Markets has forecast that the semiconductor industry will run out of steam around mid-2019 only to rise in the second half of the year. These reports could make the semiconductor space appealing to investors.
Why Invest in Semiconductor Stocks Now?
The emergence and fast evolution of new technologies such as 5G wireless networks, cloud computing, Internet-of-things and artificial intelligence have created a renewed demand for semiconductor chips. Chips are used to command everything from autonomous vehicles, data centers and video games in today’s world.
Semiconductors are the main components that power hi-tech instruments, thus helping businesses perform efficiently and improving lives of consumers. It is this need for an enhanced technological experience that is pushing demand for chips and in turn driving semiconductor stock prices.
Therefore, it would be advisable to invest in semiconductor stocks at this point. The following stocks have lucrative valuations and carry a Zacks Rank 1 (Strong Buy) or 2 (Buy).
Synaptics Incorporated SYNA is a developer and manufacturer of intuitive human interface solutions for electronic products. The company provides its products for a wide range of electronic devices such as tablets, smartphones, entertainment and wireless units etc.
Synaptics has a Zacks Rank #1 and its expected earnings growth rate for the current year is 15.1% compared with the Zacks Electronics – Semiconductors industry’s projected decline of 4.3%. Its Zacks Consensus Estimate for current-year earnings has risen 1.3% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Xilinx, Inc. XLNX is a developer of programmable devices and related technologies. These devices include various types of integrated circuits.
Xilinx has a Zacks Rank #1 and its expected earnings growth rate for the current year is 23.3% compared with the Zacks Semiconductors – Programmable Logic industry’s projected rise of 22.7%. Its Zacks Consensus Estimate for current-year earnings has risen 6.1% in the past 60 days.
Cree, Inc. CREE offers light emitting diodes, semiconductor products for radio-frequency applications and power and lighting devices etc.
Cree has a Zacks Rank #1 and its expected earnings growth rate for the current year is more than 100% compared with the Zacks Semiconductor – Discretes industry’s projected rise of 8.6%. Its Zacks Consensus Estimate for current-year earnings has risen 6.8% in the past 60 days.
Mellanox Technologies, Ltd. MLNX is a semiconductor company that manufactures and markets data transmission products and services worldwide.
Mellanox Technologies has a Zacks Rank #2 and its expected earnings growth rate for the current year is 24.2% compared with the Zacks Electronics – Semiconductors industry’s projected decline of 4.3%. Its Zacks Consensus Estimate for current-year earnings has risen 3.8% in the past 60 days.
Cabot Microelectronics Corporation CCMP manufactures and markets polishing slurries and pads that have applications in the manufacture of advanced integrated circuit devices in the chip industry in the process of chemical mechanical planarization.
Cabot Microelectronics has a Zacks Rank #2 and its expected earnings growth rate for the current year is 35.4% compared with the Zacks Electronics – Semiconductors industry’s projected decline of 4.3%. Its Zacks Consensus Estimate for current-year earnings has risen 2.5% in the past 60 days.
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