Several chip stocks that have severely fallen off this year’s highs are looking well positioned to make a strong rebound. Nvidia Corp. (NVDA), Marvell Technology Group Ltd. (MRVL), and Taiwan Semiconductor Manufacturing Company Ltd. (TSM), despite all being down in double digits from earlier highs, are considered diamonds-in-the-rough, according to a few veteran market watchers. They see the semiconductor sector as a treacherous place to be right now, according to CNBC.
3 Chips that Can Rebound
|Stock||5-year Performance||Fall from 2018 Highs|
|Nvidia||+ 1,337%||- 26.8%|
|Taiwan Semiconductor||+ 113%||- 14.3%|
|Marvell Technology||+ 31%||- 29.1%|
Source: CNN Money, Yahoo! Finance, as of 4pm EST 11/05
What It Means
Semiconductor ETFs from Van Eck Vectors Semiconductor ETF (SMH) to the iShares PHLX Semiconductor ETF (SOXX) are negative on the year and underperforming the broader market, reflecting investors’ overall dissatisfaction with the sector. Much of that dissatisfaction is based on worries that demand for semiconductor chips maybe slowing as a tech-spending binge comes to an end.
Cautious toward the sector as a whole, Stacey Gilbert, head of derivative strategy at Susquehanna Financial Group, likes a couple of individual stocks. She sees strength in Taiwan Semiconductor’s long-term growth potential. She also believes that Marvell Technology has been “shaken out in terms of just how much it’s come down” and is thus likely to rebound nicely.
“This is certainly not a sector-based trade,” says Stacey Gilbert at Susquehanna. “We certainly wouldn’t just be looking to buy the basket, if you will.”
Concurring with Gilbert’s cautious stance, Mark Tepper, CEO and president of Strategic Wealth Partners told CNBC, “These chips are not a place where we want to have broad exposure. We’re actually high-conviction underweight. And quite frankly, this isn’t a place you want to hide in a trade war, since 90% of the sector’s revenues come from overseas, which is higher than any other sector.” As for individual picks within the sector, one of his favorites is Nvidia due to its exposure to the gaming industry.
JPMorgan analyst Harlan Sur also likes Nvidia for the same reason, as well as its prospects in the autonomous-driving market, which is part of the broader market for artificial intelligence (AI) chips. He expects the AI chip market to grow 59% annually to $33 billion by 2022, according to Barron’s.
Concerning Nvidia, “We believe the company’s HPC [high performance computing] /professional visualization/datacenter momentum remains strong as new compute workload acceleration (AI/Deep Learning, Analytics, etc.) penetration remains solid,” Sur wrote in a recent research report. While cutting his December 2019 price target by $10, his new $255 target still implies an upside of 20% from Monday’s close.
Given the current riskiness in the semiconductor sector, investors will have to be vigilant in trying to pick individual winners until the macro fundamentals improve. A bail out plan might be necessary in the case where things turn really sour, or else they’ll have to hold on for a longer-term rebound.