Chip stocks have rebounded sharply in 2019, yet a few major players still trade far off their 18-month highs. These semiconductor companies are poised to see their stocks rebound even higher later this year and in 2020, according to bulls who expect a wave of new chip-packed consumer electronics, including Apple's latest iPhones, to boost sales.
Going into the key holiday season, when a great deal of these new products are bought, chip makers such as Nvidia Corp. (NVDA), Advanced Micro Devices Inc. (AMD), Taiwan Semiconductor (TSM) and United Microelectronics Corp. (UMC) are expected to outperform, according to a recent story in The Wall Street Journal.
While the Philadelphia Semiconductor Index is higher 13.7% over 12 months, all four of the stocks have lagged behind. Nvidia has fared the worst, down about 40% over the year, followed by United Micro, lower 19%, Advanced Micro Devices, down near 8%, and Taiwan Semiconductor, which has returned 4.1% over the same period.
Nvidia, Up 30% YTD, Could Rally Another 20%
SunTrust Robinson Humphrey analyst William Stein is particularly bullish on Nvidia, as outlined by Barron’s. The analyst suggests that conversations with industry insiders indicate that as demand for Nvidia products increases across a number of its end markets, the company is simultaneously getting better deals from its suppliers. This is slated to boost Nvidia’s profit margins in the quarters ahead, per Stein. All this has led the SunTrust analyst to reiterate his buy rating on Nvidia stock.
"We expect NVDA’s stock to outperform owing to superior positioning in [the] gaming, server acceleration/AI, & autonomous driving markets," wrote Stein. His $216 price target implies an approximate 19% upside from Monday close. Nvidia shares are already up over 30% year-to-date (YTD).
Data From Microprocessor Firms Signal Industry Strength
Improved revenue and billings from United Micro and Taiwan Semiconductor are also good indicators for the entire industry. This is because the microprocessors they make go into every device, signaling the demand for overall devices. Strength in microprocessors therefore could positively AMD, Nvidia, and other chip suppliers.
“A bottom has been reached and demand is set to rise,” said independent analyst Andrew Zatlin, per the Journal. In July, United Micro said that wafer shipments were expected to rise 3% at the midpoint, while Taiwan Semiconductor forecasted an 18% increase in revenue quarter-over-quarter (QOQ).
Meanwhile, shares of Nvidia, AMD and United Micro, way off their highs, make their stocks look relatively cheap.
Hurdles Facing Chip Makers
Positive drivers aside, a myriad of headwinds still face chip makers. In the seven month period ended July, global chip sales fell 16% over the same period last year, per the Semiconductor Industry Association. The crypto winter, following the surge of Bitcoin and other digital currencies at the end of 2017, took a bite out of chip makers. This is due to the sharp decline in demand for chips from crypto miners.
Another major reason investors have been ditching chip makers is the sector vulnerability to a re-escalation of trade tensions between the U.S. and China, due to their complex supply chains that span across the world. Broader geopolitical uncertainty comes as some bears signal decelerating economic growth.
Earlier this year, Zatlin warned about a sharp downturn he expected to hit the market in the second half of the year, per another Journal report. Since chip sales precede sales of the devices they are used in, from smartphones to airplanes, he suggests that the chip market is a good indicator of where the broader market is headed.
Weak sales in July, he noted, spelled bad news for the holiday season. If the decline in chip sales continues to warn on weaker demand across China, Europe and Asia, chip makers could fall even further from highs.