2019 was a turbulent year for the semiconductor industry, to say the least. Trade issues between the US and China, slowing demand for smart devices, and tumbling memory chip prices all played their part. However, the industry has continued to exhibit strong growth. The PHLX Semiconductor Sector Index’s (SOX) 60% gain easily beats the S&P 500’s impressive 29% increase this year.
As the 2020s kick into gear, the industry stands to benefit from several tailwinds: the wider deployment of 5G networks, the increasing amount of Internet of Things (IoT) devices, the growth of artificial intelligence (AI), data centers and storages - all of which count on the semiconductor industry.
Against this backdrop, investment firm Rosenblatt Securities recently issued a report with the firm's three semiconductor picks for 2020. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other and got the lowdown on what the new decade has in store for the firm’s choices. Let’s take a look.
Advanced Micro Devices (AMD)
One of the past year’s best performers is semiconductor powerhouse Advanced Micro Devices. Gaining 148%, it was one of the S&P 500’s most impressive growth stories in 2019.
Throughout the year, the company fired on all fronts; AMD has taken advantage of Intel’s shortages in the low end of the PC market and has bitten a decent chunk out of its rival’s market dominance; It has partnered with Google on its Stadia cloud gaming service, which uses a custom AMD GPU; Tencent announced its cloud-computing service will use AMD’s second-generation EPYC processors. Furthermore, the company has seen new products such as the Ryzen third generation processors fly off the shelves.
Following all the good news, is AMD about to slow down in 2020? Not according to Rosenblatt’s Hans Mosesmann, who thinks AMD is “poised for P/E multiple expansion in 2020.”
The analyst said, “We view 2020 as a year that will continue the early momentum in CPU share gains in 7nm desktops/servers, and see limited competitive threats slowing the momentum train for the upcoming new 7nm mobile Ryzen. In a narrative that has yet to gain traction or interest from the Street, we see AMD’s roadmaps as unique and strong in both x86 CPUs and GPUs, which have a fundamental advantage in high performance computing (the Frontier supercomputer, for example, uses tightly coupled AMD CPUs and GPUs), and have yet to be copied (Intel has tried the GPU dance for 20 years) or are not legally possible (lack of an x86 license) for Nvidia.”
Accordingly, then, the 5-star analyst reiterated a Buy rating on AMD along with a price target of $65, implying potential upside of 42%. (To watch Mosesmann’s track record, click here)
But the Street does not share this optimism, as the consensus price target of $40.24 suggests a downside potential of nearly 18% from the current share price. This could be due to several reasons; either AMD has soared so high during 2019 that a number of analysts think the time for a pullback is near, or that some have simply not updated their models, yet. Either way, it remains to be seen if the bulls or the bears dictate AMD’s upcoming year. (See AMD stock analysis on TipRanks)
Micron Technology (MU)
A fellow chipmaker beating the rest of the market in 2019 is Micron. The memory chip specialist closed out the year up 69% despite some serious headwinds along the way.
The company took a hit earlier in the year when it had to suspend shipments to its Chinese client, Huawei, as a result of the US-China trade war. Additionally, an oversupply on top of a lack of demand, bought memory chip prices down. Of the former, Micron was able to circumvent the embargo by exploiting a loophole which showed that a “subset of current products” was not “subject to export administration regulations and entity list restrictions.” Of the latter, Rosenblatt's Mosesmann notes, “We saw clear incremental market signals of shortages (in server DRAM and NAND SSDs), contract prices starting to improve, and Micron/industry supply discipline pointing to a desirable and broader S/D balance as 2020 plays out.”
Mosesmann added, “Cycle naysayers or investors looking for broad and unambiguous evidence of a cycle turn will miss the next significant move in the shares, we believe, and it is their timidity that provides us the opportunity entering 2020. Micron is clearly a better company in virtually all dimensions, with a richer/stickier product stack, a model that is delivering 50% FCF to investors, and sports an investment grade credit rating from the three key major credit agencies.”
The bullish thesis has the Rosenblatt analyst reiterating a Buy on Micron stock alongside a $100 price target. Should the target be met, investors will be taking home over 80% gain in the coming year.
The Street is with the bulls on Micron but is not quite as enthusiastic as Mosesmann. The analysts’ average price target comes in at $62.36 and presents upside potential of 13% from current levels. (See Micron stock analysis on TipRanks)
Xilinx Inc (XLNX)
Not quite hitting the giddy heights of Rosenblatt’s two previous choices is chipmaker Xilinx. The FPGA circuit inventor finished 2019 up by 15%, way behind the PHLX Semiconductor Sector Index’s gain.
So, what gives? Xilinx made a strong start to the year following the deployment of 5G networks in South Korea, but the company was hit hard by the trade war. Unlike Micron, it was unable to resume its shipments to Huawei.
With the tensions between the two superpowers easing and 5G set for wider roll out across different countries in 2020, Xilinx, according to Rosenblatt’s Hans Mosesmann, stands to benefit. The analyst said, “We see 5G stabilizing in 2020 and continue to view the 5G cycle for Xilinx to be several times larger than current ~$400 million/year baseline 4G business.”
Furthermore, Mosesmann pushes the bullish case by noting “FPGAs are at the very early innings of a secular growth dynamic in compute acceleration.”
“FPGAs appear to be in the early days of a next wave in computing, reminiscent of when compute GPUs inflected 5-7 years ago for Nvidia (with massive attendance growth at the GPU Technology Conference events), coincident with the decline and eventual cancellation of the Intel Developer Forum (IDF),” the 5-star analyst further added.
Xilinx, therefore, is a top pick for Mosesmann, who reiterated a Buy rating on the stock alongside a price target of $165. This conveys the analyst’s belief that the chipmaker can soar nearly 70% in 2020.
Following the pattern to a T, the rest of the Street is positive on XLNX, but not quite to the same extent. The Street’s average price target of $111.85 indicates that upside of 11% could materialize over the next 12 months. (See Xilinx price targets and analyst ratings on TipRanks)