Chip stocks face numerous challenges right now. Fundamentally speaking, markets continue to weaken due to the ongoing U.S./China trade war, while channel inventories remain elevated. Further headwinds arise from the US government's Huawei restrictions and weak 2H19 iPhone builds (down 15% year-over-year) aren't helping either.
Luckily, top-rated KeyBanc analyst John Vinh has just released a valuable report setting out his chip expectations going into second quarter earnings. And he selects two chip stocks that still offer a compelling outlook for investors.
However the analyst does caution “Huawei expectations are likely to be a source of confusion, as it remains unclear as to which suppliers have stopped or resumed shipments given different interpretations of the entity list rules.” With this warning in mind, let’s take a closer look at the two buy-rated stocks now:
Broadcom Inc (AVGO)
The number one chip stock for Vinh is semiconductor giant Broadcom. Vinh sees positive risk/reward for AVGO right now thanks to a slew of encouraging reasons. Most notably, the company’s current guidance excludes contributions from Huawei. As a result the analyst believes the easing of trade restrictions and possibility Broadcom has already begun shipping will allow the company to reiterate full -year guidance.
At the same time, Vinh singles out M&A as a defensive mechanism in the current downturn. That’s because accretive cost synergies should limit downside risk to EPS. “While the acquisition of another software company is unlikely to result in multiple expansion, outsized earnings growth is likely to lead to stock outperformance assuming the current valuation multiple remains constant” explains the analyst on July 16. For example, the company was recently in talks to buy out cybersecurity stock Symantec (SYMC), although the deal has now reportedly stalled over price disagreements.
Nonetheless, as Stacy Rasgon, an analyst with Bernstein commented: “Broadcom buys software companies, that’s their strategy. If this falls apart, they’ll buy something else at some point.”
Putting this altogether, Vinh expect AVGO to post in line F3 Q19 (Jul) results and reiterate full -year guidance. (Note that Broadcom reports results off quarter, which means that its next earnings are for the fiscal third quarter.) The analyst’s current $310 price target indicates 9% upside from the stock’s $284 price target. Even though the stock has faltered in the last three months, shares still are up 12% year-to-date. That’s with an impressive 1-year change of 40%.
Adding weight to his call is the fact that we can see Vinh has a strong 88% success rate return when it comes to his AVGO ratings. That’s with an average return per Broadcom rating of 31.8%.
Encouragingly, the Street shares this bullish approach. The stock holds a Strong Buy analyst consensus, and a $312 average price target (10% upside potential). In fact, out of 27 analysts polled on the stock in the last three months, 21 rate the stock a buy and only 6 rate the stock a hold.
Xilinx, Inc. (XLNX)
Also on Vinh’s ‘buy’ list is Xilinx, a supplier of programmable logic devices. The stock has surged since June when the company revealed that its seven nanometer (nm) Versal adaptive compute acceleration program (ACAP) chips had already begun shipping to customers.
“We believe current estimates are achievable given 5G rollouts exChina and the anticipated recovery in AIT (A&D, Industrial, TME). We anticipate in-line F1Q20 (June) results and in-line to higher F2Q20 (Sept.) guidance” writes Vinh. The company is set to report June quarter earnings on Wednesday, July 24th, after the market close.
The analyst adds: “We believe expectations for XLNX have already been largely been derisked, when the Company previously lowered its outlook for WWG (Wired and Wireless Group) to 12.5% growth in FY20 (March).”
He has a $130 price target on the stock- which is exactly in line with the Street’s average price target. Meanwhile Vinh’s track record on Xilinx works out slightly under his AVGO record- but the success rate is still an impressive 76% with a 24.4% average return per rating.
Overall, the Street shows a cautiously optimistic outlook for Xilinx stock. The stock has a Moderate Buy consensus with analysts equally split between hold and buy. Right now, the most bullish analyst on the stock is Hans Mosesmann of Rosenblatt Securities. He recently ramped up his price target to $165, indicating 37% upside potential.
“Even with Huawei not expected to be a major customer for Xilinx in the future, we believe management will continue to support a 5-year mid-teens sales and earnings growth profile driven by data center acceleration, 5G broad-based exposure outside of Huawei, and industrial/ automotive traction enabled by an aggressive 7nm process technology ramp” explains Mosesmann.