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Semiconductor Market on Growth Trajectory: 4 Strong Buys

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Global semiconductor sales reflected both a month-over-month and a year-over-year increase in November, according to latest data from the Semiconductor Industry Association (or SIA).

The global semiconductor industry, which is the building block for emerging technologies including AI, ML, IoT, blockchain, and advanced quantum computing, has been resilient to the coronavirus pandemic induced macroeconomic crisis, courtesy of robust data center chip demand.

Recovery in automotive end-market and solid momentum in smartphone processors on rebound in smartphone market are likely to act as tailwinds for the industry in the days to come.

Strong demand for electric vehicles (EVs) and plug-in hybrids is another catalyst. EVs require complex electronic systems composed of advanced semiconductors.

Record YoY Jump in November

The SIA announced on Jan 4 that global semiconductor sales reached $39.4 billion in November 2020, up 7% year over year — marking its “highest percentage since March.” Also, sales increased 1.1% from October 2020.

Regionally, sales increased 12.5%, 6.5%, 6.5% and 5.1% year over year in the Americas, China, Asia Pacific, and Japan, respectively. However, sales declined 0.7% on a year-over-year basis in Europe.

Semiconductor Space Looks Good In 2021

Evolution of semiconductor manufacturing processes from 10 nanometer (nm) to 7 nm and even 5 nm technology is opening new business avenues.

Microchip demand is expected to get a boost with the 5G boom in Europe and parts of Asia, including China and Singapore. IDC expects 5G smartphone shipments to grow to 58% in 2024 from 19% of global volume in 2020, which should act as a tailwind for the semiconductor market.

In fact, per latest World Semiconductor Trade Statistics data, the global semiconductor market is now predicted to improve 8.4% in 2021, based on double-digit growth of memory and optoelectronics. The forecast for 2021 is higher than the previously projected growth of 6.2%, made by the WSTS in July.

Ongoing infusion of AI and ML, momentum in digitization, high performance computing (HPC) applications, gaming, wearables, drones, EVs and VR/AR devices are fueling massive growth in the semiconductor space.

This can primarily be attributed to the coronavirus crisis, which has led to an increase in usage of online services globally.

Apprehensions regarding the outbreak of new COVID-19 strain is likely to accelerate the digitization push, with work-from-home and web-based learning trends bolstering demand for processors utilized in enterprise laptops, data center servers, PC systems, notebooks, tablets, and smartphones. This, in turn is expected to benefit the chip stocks in 2021.

Growing clout of high-speed networking, smartphone processors and high-performance data center applications necessitate the delivery of advanced chips further, which in turn favors prospects.

Further, the accelerated deployment of 5G technology — the next-generation wireless revolution — is likely to spur growth. New 5G smartphone devices from Apple AAPL and Samsung will make the technology more accessible. Intel INTC and MediaTek-supported 5G notebooks are also expected to hit the shelves in 2021.

Meanwhile, high-speed 5G roll out is also expected to accelerate the adoption of IoT. These are expected to result in unprecedented demand for memory chip, power amplifier and AI semiconductors.

Notably, the broader iShares PHLX Semiconductor ETF SOXX is up 51.7% compared with the SPDR S&P 500 ETF's (SPY) rally of 14% in the past year.

Our Picks

On the heels of the aforementioned considerations, the semiconductor giant NVIDIA NVDA and other notable names like Micron MU, MACOM Technology Solutions MTSI, and Advanced Energy Industries AEIS, are expected to grow through 2021 on surge in semiconductor sales and solid fundamentals.

Moreover, each of the stocks currently sport Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

One Year Price Performance

NVIDIA is benefiting from the pandemic-induced work-from-home and learn-at-home wave. The company is poised to gain from solid demand for GeForce desktop and notebook GPUs, which is anticipated to boost gaming revenues. Moreover, a surge in Hyperscale demand is a tailwind for the company’s Data Center business.

Further, Arm acquisition is expected to aid NVIDIA in offering end-to-end ecosystem of technology across the data center, IoT, autonomous vehicles and mobile domains. NVIDIA is now well positioned to upscale its inference technology, drivers, and accelerators by utilizing Arm’s robust architecture and chip designs.

The Zacks Consensus Estimate for its fiscal 2021 earnings has been revised upward by 5.2% in the past 30 days to $9.71 per share, which indicates bullish sentiments for the stock. The figure indicates growth of 67.7% on a year-over-year basis.

Micron is gaining from solid demand for memory chips from cloud-computing providers and acceleration in 5G adoption.

Micron has been witnessing stronger memory-chip demand from PC manufacturers and data-center operators. Further, 5G adoption beyond mobile is likely to spur demand for memory and storage, particularly in IoT devices and wireless infrastructure. Also, focus on improving its cost structure and increasing the mix of high-value solutions in its portfolio is likely to drive margins.

The Zacks Consensus Estimate for its fiscal 2021 earnings has been revised upward by 17.7% in 30 days’ time to $3.66 per share. For fiscal 2022, the consensus mark for earnings has moved north by 13.9% to $6.78 per share over the same time frame.

MACOM Technology Solutions is benefiting from growing proliferation of cloud services. Also, high-performance analog components such as TIAs, CDRs and drivers, which are required in 100G deployment, are strengthening MACOM’s presence in the data center market.

The company is optimistic regarding strong 5G network deployment, rising demand for its RF and microwave products, strength across defense applications and growing data center traffic, which are expected to continue driving its top line. An improving free cash flow-generating ability is another positive.

The Zacks Consensus Estimate for MACOM’s fiscal 2021 earnings has been revised upward by 3.8% in the past 60 days to $1.63 per share.

Advanced Energy is poised to gain from strong momentum across semiconductor equipment, telecom and networking, industrial and medical, and data center verticals.

Particularly, solid demand for the company’s power supplies for medical applications amid growing clout of critical care medical devices is expected to contribute to the top line in 2021. Moreover, increasing investments in foundry/logic, complex 3D NAND devices, DRAM, and foundry and logic remains a tailwind for the company.

Also, strengthening momentum across hyperscale customers is favoring Advanced Energy. Further, positive contributions from the Artesyn buyout are encouraging. Notably, the successful integration of Artesyn has generated significant synergies (roughly $30 million) and record accretion ($1 per share over the past four quarters).

Additionally, benefits from rapid 5G deployment and prospects in the data center market are encouraging.

The Zacks Consensus Estimate for its 2021 earnings has moved 17.5% north in the past 60 days to $5.10 per share.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Micron Technology, Inc. (MU) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Intel Corporation (INTC) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Advanced Energy Industries, Inc. (AEIS) : Free Stock Analysis Report
iShares PHLX Semiconductor ETF (SOXX): ETF Research Reports
MACOM Technology Solutions Holdings, Inc. (MTSI) : Free Stock Analysis Report
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