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If you are looking to invest in potential stocks from the semiconductor space, you can’t ignore NVIDIA NVDA.
For the past two years, NVIDIA has been impressing investors with its stellar performance, wherein the company’s quarterly revenues have been advancing at a rate more than 50%, earnings have tripled and shares have displayed more than six-fold growth, consequently.
Moreover, in the year so far, the stock has rallied 26.9% as against growth of 1.4%, 8.1% and 8.3% recorded by the S&P 500, iShares PHLX Semiconductor ETF (SOXX) and Technology Select Sector SPDR ETF (XLK), respectively.
The share price rally highlights that the slew of bad news related to the company, such as sluggish demand from cryptocurrency miners and Uber’s driverless-vehicle test incident, which prompted NVIDIA to suspend test drives for all its driverless vehicles, did not have any negative impact on investors.
We also believe Uber’s driverless-test mishap will lead to increased investment by vehicle makers to make driverless cars safer. Hence, demand for NVIDIA’s chips will remain unaffected, in our opinion. Moreover, this March, the company unveiled the Constellation driving simulator which enables companies to test self-driving systems in a virtual environment.
Although NVIDIA doesn’t expect the new simulator to fully replace real-world testing of self-driving cars, the number of trials will likely come down, significantly. We believe the latest simulator will enhance NVIDIA’s competitive position in the self-driving car market space, particularly against chip makers, like Intel and Advance Micro Devices.
Furthermore, although NVIDIA predicts a slowdown in crypto-specific GPUs revenues in the near term, we believe this will be immaterial to its financials. The company foresees demand for its GPUs to shift from miners to gamers, going forward, which will boost the gaming business revenues and offset loss of revenues from miners.
NVIDIA, which flaunts a Zacks Rank #1 (Strong Buy), surpassed the Zacks Consensus Estimate over the preceding four quarters, the average positive surprise being 40.1%. The company witnessed sharp upward estimate revision over the past 7 days. The EPS estimate for the current quarter increased 5.4% (9 cents) to $1.77 per share, during the same time frame, and reflects year-over-year growth of more than 75%.
Of course, NVIDIA is our first choice in the semiconductor industry, however that does not mean the list ends here as several companies in the space are likely to benefit from the rising demand for chips.
Solid Industry Growth Projection
The semiconductor industry has been benefiting from the rising demand for chips used in cloud-based platforms, Artificial Intelligence (AI) tools, Augmented/Virtual (AR/VR) reality devices, autonomous cars, advanced driver assisted systems (ADAS), as well as Internet of Things (IoT) related software and hardware.
Notably, according to the latest report of World Semiconductor Trade Statistics (WSTS), semiconductor revenues climbed 20.6% year over year to $408.7 billion in 2017. It is believed the semiconductor industry will continue to witness growth this year as well, although not as high as 2017, but still at a respectable rate. Per the WSTS report, semiconductor revenues are likely to touch $437.3 billion in 2018, marking 7.7% growth.
Additionally, the U.S. chip-equipment makers’ earnings and cash flow are likely to get further boost from President Trump’s business-friendly tax-cut policies. The tax reform will make semiconductors repatriate significant amount of cash held abroad and eventually drive after-tax earnings. Chip makers can also use this extra cash for research and development, and mergers & acquisition activities.
Therefore, it is wise for investors to have some semiconductor stocks in their portfolio which have potentials to provide better returns.
4 Semi Stocks for Rest of 2018
Micron Technology, Inc. MU takes the second position in our list after NVIDIA. Micron has turned out to be one of the best performers in the semiconductor industry, in the year so far. The company’s shares have appreciated nearly 31.3% during the period, a much better performance than the S&P 500, iShares PHLX Semiconductor and Technology Select Sector SPDR ETFs.
This outperformance can be primarily attributed to Micron’s robust revenue and earnings growth, as well as expanding margins. We note that the company posted positive earnings surprise of 8% in the past four quarters.
We believe the company will continue its splendid growth performance in the quarters ahead. The optimism surrounding the stock comes from the fact that the DRAM market is still witnessing a huge demand-supply gap which has been escalating prices.
It should also be noted that as Micron generates nearly 70% of its revenues by selling DRAM products, the company is the biggest beneficiary of this supply shortage. In the last reported quarter, sales from DRAM products witnessed a massive 76% year-over-year increase.
Micron, which has a Zacks Rank #2 (Buy), has also witnessed significant earnings estimate revision in the past 60 days. The EPS estimate for the current quarter moved up 3% (8 cents) to $2.84 per share during the same period.
Our next pick is Lam Research Corporation LRCX. The company is anticipated to benefit from the improving WFE market, elevated demand for server DRAM and increased adoption rates of 3D NAND technology in the near future. This is driven by cloud computing, big data, mobile devices and IoT. The company has undertaken cost-reduction activities, and density scaling for 3D NAND and new memory technologies.
The company, which sports a Zacks Rank of 1, outpaced the Zacks Consensus Estimate over the past four quarters, coming up with an average positive surprise of 9.1%. The EPS estimate for the current quarter moved up 8.9% (41 cents) to $5.00 per share, in the last 30 days. The stock has ascended 9.8% in the year-to-date period. You can see the complete list of today’s Zacks #1 Rank stocks here.
The next stock in our list is KLA-Tencor Corporation KLAC. KLA-Tencor is likely to benefit from an expanding product portfolio. Furthermore, the technical complexity of manufacturing semiconductors and increasingly challenging yield issues are anticipated to drive growth for the company’s process control and yield-management solutions.
KLA-Tencor’s shares have gained 6%, in the year so far. The company, which sports a Zacks Rank of 1, outpaced the Zacks Consensus Estimate, over the past four quarters, delivering an average positive surprise of 7.5%. Moreover, the EPS estimate for the current quarter moved up 9.2% (18 cents) to $2.14 per share, over the past 30 days.
The next stock on our radar is Texas Instruments, Inc. TXN. The company’s continued focus on adding new products in the industrial and auto space is estimated to effectively address the increasing demand for semiconductor content in these markets. Additionally, Texas Instruments’ solid presence in other end markets, stable revenue stream and rising demand for its products will broaden the company’s clientele and addressed market.
Results of this Zacks Ranked #1 company outpaced the Zacks Consensus Estimate in three occasions and came in line in the other, over the preceding four quarters. This resulted in an average positive surprise of 7.5%. The EPS estimate for the current quarter moved up 5.7% (7 cents) to $1.30 per share, over the past 30 days. The stock has ascended 4.6% in the year-to-date period.
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