Silicon chips are absolutely essential to our modern digital world. You’ll find them in everything from your PC to your smartphone to your car to your coffee maker – even the pedestrian light at the crosswalk is controlled by semiconductor chips, giving the chip makers the benefit of a captive customer base.
5-star analyst C.J. Muse, of Evercore ISI, builds his view of the chip stocks’ prospects on that base, writing: “With every industry vertical increasingly focused on digitalization combined with product cycles including 5G, AI/ML, a broad-based recovery in Auto/Industrial as well as expected continued strength in PCs and a recovery in Networking … our base case calls for Semi revenues to grow 14% in CY21 to $500B.”
This isn’t the only positive point, as Muse goes on to say, “Add in potential for stimulus combined with very lean inventories and likely supply constraints and we think risk for growth is higher and that we may finally see a cycle in this cycle (meaning a 6-8 quarter upcycle).”
There is agreement among Wall Street’s best analysts that chip stocks have a bright future, and Muse’s Street colleagues have been busy picking the equities they see as winners in the coming year.
Using the TipRanks database, we identified three such stocks that have received overwhelmingly bullish praise from the Street, enough to earn a “Strong Buy” analyst consensus.
Silicon Motion Technology (SIMO)
The first semiconductor name we’re looking at is Silicon Motion Technology. The company’s main products are NAND flash memory circuits for solid-state storage units. SIMO also produces chips for flash cards and USB drives. Recent share gains show the strength of that niche; Over the past 3 months, SIMO stock rose 74%, and is now trading at just under its 52-week high.
SIMO reported its Q4 and full-year 2020 results earlier this month, which were slightly mixed. Year-over-year, the quarter showed a 6% decline to $143.9 million in revenue. Sequentially, however, revenues gained 13%. For the full year, the top line of $539.5 million was up 17% yoy. For the quarter, the company saw strong yoy gains in SSD component sales.
The company finished the quarter – and year – with a solid liquidity position, reporting $369.2 million in cash and cash equivalents on hand, a gain of 5.4% yoy. Along with the firm cash position, the company also declared its dividend for the current quarter. The dividend – to be paid on February 26 – is for 35 cents per common share. This annualizes to $1.40, and gives a yield of 2.2%.
Covering the stock for Craig-Hallum, analyst Anthony Stoss believes that based on current trends, SIMO is on a clear path to achieve a company goal of hitting $1 billion in sales by 2023.
“While we are currently modeling for FY23 EPS slightly below $8 due to an increased tax rate, we think SIMO’s revenues could come in above $1B in FY23 driving EPS of $8+. SIMO expects their Client SSD business to double in the next 3 years as they gain market share working towards their 40% target, SSD adoption accelerates outside of notebooks and SIMO’s next gen PCIe solutions gain traction,” Stoss noted.
“With multiple growth drivers in place for the next several years, margins set to improve as supply issues alleviate and SIMO potentially delivering $8+ in EPS within 3 years,” Stoss keeps his Buy rating on SIMO intact. The analyst suggests that if everything goes as planned, SIMO will be a $100 stock in the next 12 months, implying ~57% return. (To watch Stoss’ track record, click here)
Silicon Motion presents investors with a Strong Buy analyst consensus rating, based on 8 reviews which include 6 Buys and 2 Holds. The stock’s trading price is $63.43, and the average price target is $69.50, implying ~9% upside from that level. (See SIMO stock analysis on TipRanks)
ON Semiconductor (ON)
From an SSD specialist, we’ll move over to sensors, microcontrollers, and optoelectronics. ON Semiconductor produces the chips necessary for these devices, solving problems for engineers in a range of sectors. ON’s products are found in memory systems, interface switches, logic boards, drivers, and power management units. The company boasts a market cap of $17.3 billion, annual sales exceeding $5 billion, and the stock has gained 47% over the last 90 days.
ON’s Q4 and 2020 full-year results showed a modest year-over-year gain, but stronger sequential gains. The fourth quarter revenue was $1.45 billion, up 3% from the year-ago quarter and 10% from Q3. EPS in Q4, at 21 cents, was up 50% year-over-year. For the full year 2020, the company reported strong gains in cash flow. Cash from operations rose from $694.7 million to $884.3 million, a gain of 27%. Free cash flow, which was $160.1 million in 2019, increased by 212% to $500.1 million in 2020.
In December, ON announced that Hassane El-Khoury has stepped up as the new CEO and company President. This was followed by the January announcement that Thad Trent would take the exec VP and CFO positions effective this month.
Craig Ellis, 5-star analyst with B. Riley Securities, sees the new management as a net positive for the company.
“We are encouraged with new management’s more selective focus on high margin leadership products as a prioritization lever for vertical integration, R&D, and channel strategies… We believe Street estimates will reset higher but with further longer-term upside potential even as GM expansion initiatives seem broader and more readily actionable than we previously expected,” Ellis opined.
To this end, Ellis rates ON a a Buy, and his $50 price target indicates confidence in a 19% upside potential. (To watch Ellis’ track record, click here)
Overall, there are 19 recent reviews on record for ON Semiconductor, and no fewer than 16 of them are Buys. Of the remaining three, 2 are Holds and 1 is a Sell. This gives ON a Strong Buy analyst consensus rating. However, the majority expect shares to stay range bound for now, as the current $42.03 average price target indicates. It will be interesting to see whether the analysts downgrade their ratings or upgrade price targets over the coming months. (See ON stock analysis on TipRanks)
Micron Technology (MU)
Among the leading chip makers, Micron has staked out a position in the memory segment. The company has seen its market cap expand to $99 billion, as shares have appreciated 43% over the past 3 months. These gains have come as the company’s data storage, flash storage, and DRAM chips have seen a surge in demand.
The company’s fiscal 2021 is getting off to a good start. Fiscal Q1 saw a top line of $5.77 billion, up 12.2% year-over-year. EPS gained 65% yoy, and came in at 71 cents.
Along with strong quarterly results, Micron has, in recent quarters, been debuting new memory technology. These include the first 176-layer NAND chip, announced back in November, which promises an upgrade to flash memory performance – and has applications in automotive, data center, and mobile applications. This past January, Micron announced the first volume delivery of 1-alpha DRAM chipsets. The new chips are expected to see strong sales in the year ahead.
Covering this stock for Rosenblatt Securities, 5-star analyst Hans Mosesmann writes, “Strong demand in cloud, client, auto, and mobile are helping improve conditions across DRAM, while a power outage and earthquake has limited DRAM supply… Looking longer-term, an economic recovery and secular trends (5G and AI) is expected to result in stronger demand.”
Unsurprisingly, Mosesmann gives MU shares a Buy rating and a $120 price target, implying an upside of 36% for the next 12 months. (To watch Mosesmann’s track record, click here)
All in all, Micron has 22 recent Buy reviews, out of 24 on record, giving the stock a solid foundation for its Strong Buy consensus rating – and demonstrating Wall Street’s confidence in the company and the stock. Shares are trading for $88.12, and their $97.64 average price target suggest room for ~11% upside in the coming months. (See MU stock analysis on TipRanks)
To find good ideas for semiconductor stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.