The semiconductor space has been one of the best sectors in the market over the past few years. Top semiconductor stocks like Nvidia (NASDAQ:NVDA) have soared. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) has tripled in the past five years.
Whether that’s good news or not depends on whether an investor believes that “this time is different” for the sector. Semiconductors traditionally have been cyclical and volatile stocks. Big gains often have been followed by steep declines (for instance, the SOX index fell hard in 2003, 2005 and 2009).
But with the adoption of cloud computing, Internet of Things and increasing technology in automobiles, there’s a case that the industry is moving from cyclical performance to secular growth. That case has driven big gains across the sector so far — and if it’s correct, there still should be more room to run. For investors who see chips as a long-term growth market, here are the five top semiconductor stocks to buy right now.
Top Semiconductor Stocks: Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) was a star performer, rising from $2 in early 2016 to $15 barely a year later. Since then, however, AMD has mostly stalled out, even with a torrid run that began with a Q1 earnings beat in late April.
But I wrote earlier this month that AMD has potential upside and after a 10% pullback the past few sessions the stock looks even more attractive. New product lines like the Ryzen and the EPYC are making AMD a real competitor in PCs and in datacenters — not just a lower-cost, lower-performance alternative to Intel (NASDAQ:INTC) and Nvidia.
Valuation is a bit stretched, but not prohibitively so. AMD has operating leverage coming as its revenue grows, and the success of its newer products should help pricing and gross margins as well. This truly looks like a new AMD, but the market hasn’t quite priced that in just yet.
Top Semiconductor Stocks: Broadcom (AVGO)
Broadcom (NASDAQ:AVGO) shares tanked after its acquisition of Qualcomm (NASDAQ:QCOM) fell through. But both stocks have rebounded — AVGO gained some 20% between early May and mid-June before a recent pullback.
Here, too, there’s more room for upside. In the wake of the Qualcomm deal falling through, the narrative around AVGO seemed to change. Investors acted as if Broadcom’s sole avenue for adding value was through acquisitions, and they ignored the company’s impressive history of organic growth.
Both avenues still are open to Broadcom – and yet AVGO stock is pricing in basically zero growth. The stock trades at less than 13x forward earnings, a lower multiple than any large-cap semiconductor play. Intel reportedly has considered acquiring Broadcom for its mobile portfolio, and there’s plenty of value to be gained as a standalone as well. Even off the lows, AVGO still looks too cheap.
Top Semiconductor Stocks: Photronics
Photronics (NASDAQ:PLAB) is a relatively under-covered supplier to semiconductor manufacturers. Photronics manufactures photomasks, which are used in the chip production process.
Historically, it hasn’t been a great business. Mask production has moved in-house at major manufacturers like Intel, limiting the market for external suppliers like Photronics. As a result, PLAB stock has traded mostly sideways, and missed out on the big rally in the space.
But Photronics looks positioned to finally jumpstart growth. Two new facilities in China should make the company the major supplier to the growing industry in that country. Flat-panel display growth at key customer Samsung provides another driver, and new nodes in IC (integrated circuit) will need new masks as well.
Meanwhile, PLAB is exceedingly cheap, has a strong balance sheet and is priced for pretty much negative growth after a recent pullback. Barring a major escalation of the trade war in China, PLAB should be able to grind higher over the next few quarters.
Top Semiconductor Stocks: Xperi (XPER)
IP licensing company Xperi (NASDAQ:XPER), the former Tessera Technologies, has seen its stock plummet of late. XPER stock sits not far from a five-year low.
The decline seems like too much. A loss in a patent battle with Samsung appears to have driven some of the recent negative sentiment. But that loss follows a nice win against Broadcom. And Xperi continues to own a solid portfolio — with a strong base of licensing revenue.
At 8x forward earnings, and with a dividend yield of 4.7%, XPER looks simply too cheap at this point. And if the semiconductor space continues to strengthen, its patent portfolio should become only more valuable.
Top Semiconductor Stocks: Micron (MU)
Micron Technology (NASDAQ:MU) is the epitome of the “cyclical or secular?” debate in the semiconductor space. Bulls see a stock that looks ridiculously cheap (barely 5x earnings!). Bears see a company teetering on the edge of a cyclical collapse. After all, memory prices are usually good … until supply expands. As such, the same cycle that sent MU stock from $35 to under $10 in 2015 to 2016 could reappear at any time.
But I continue to believe that MU stock should be cheap, but not this cheap. Memory demand should benefit long-term from cloud computing. Suppliers like Samsung and SK Hynix (hopefully) have learned their lesson from the last cycle.
The bear case here isn’t imaginary. Cyclical risk does exist. But a good chunk of that risk already is priced in and yet Micron earnings, and Micron stock, continue to grind higher.
As of this writing, Vince Martin is long shares of Photronics.
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