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Wall Street is back in love with chip stocks

Chip stocks are suddenly back in vogue. Intel’s stock (INTC) rallied 7.5% in mid-afternoon trading after the company reported record third-quarter profits and raised its full-year sales guidance. The rosy report is despite the U.S.-China trade war, capacity shortages, and increased competition from Advanced Micro Devices (AMD).

Intel’s stellar news comes just days after a disastrous third quarter for rival Texas Instruments (TXN), which also included a gloomy outlook.

“We are getting a very mixed picture of the semiconductor industry right now because the demand signals are distorted by trade,” Vivek Arya, U.S. semiconductors analyst at Bank of America Merrill Lynch, told Yahoo Finance’s “The First Trade.”

Despite a somewhat cloudy backdrop, the iShares PHLX Semiconductor ETF (SOXX) is up nearly 28% so far this year, compared with the S&P 500 index (^GSPC), which is up nearly 12% in that same period.

“The good news for semiconductors is that this is not just a China story, this is a cloud story, this is an AI story, this is a 5G story, and there is a new cycle in gaming.”

Arya says growth drivers for the semiconductor industry are more diversified than ever, and that investors should be sure to differentiate between chipmakers that have different kinds of exposure.

Texas Instruments DSP chips, photo on black

“Texas Instruments is more exposed to the cyclical parts of the economy such as industrial and automotive,” he says. “On the other hand, Intel is exposed more to a PC market that has actually been pretty stable this year, exposed to more cloud spending, and Intel has had a number of product introductions this year.”

Growth drivers in 2020

Arya believes a big driver of growth for the semiconductor industry in 2020 will be the adoption of 5G, including the construction of 5G networks, as well as the demand for 5G smartphones.

“Taiwan Semiconductor (TSM) is very exposed to the 5G sector,” says Arya, “and so it’s buying a lot of semiconductor capital equipment” to prepare for a larger rollout of the next generation cellular network technology.

In contrast, Arya says Intel wants to benefit from an increase in cloud demand and the increasing bandwidth that will be required to support 5G infrastructure.

Chipmaker Nvidia (NVDA) has been on a tear, up more than 40% year-to-date, and it’s one of Arya’s top picks this year. “They’re going through a number of new product cycles next year in gaming and AI, conversational AI specifically and natural language processing that we think will be the next big thing.”

Arya says demand for computing will be big drivers of growth in 2020 for chipmakers including Intel, Broadcom (AVGO), AMD and Nvidia. Investors will get more clues on the health of the chip sector Oct. 29, when AMD reports its third-quarter results.

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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