The tech revolution has a long way to run, and the shares of key players still have significant upside potential, according to Paul Wick, manager of the $6.4 billion Columbia Seligman Communications and Information Fund (SLMCX), Barron's reports. His top picks include these five, with their cumulative gains since the start of 2017: Micron Technology Inc. (MU), 101%; Western Digital Corp. (WDC), 32%; Intel Corp. (INTC), 31%; Marvell Technology Group Ltd. (MRVL), 72%; and Oracle Corp. (ORCL), 36%.
'Yes For Semiconductors'
Mircon and Intel are pure semiconductor plays. As Wick tells Barron's, "semiconductors are an inexpensive way to play a lot of the best secular trends in technology, including the cloud, the amount of compute power in the cloud, storage needed in cloud data centers, memory for virtualization, and higher-speed networks to reduce latency to the cloud."
Additionally, he continues, semiconductors are at the heart of other key technological developments such as electric vehicles, autonomous driving, automotive safety, artificial intelligence (AI), and the Internet of Things (IoT). Moreover, Wick adds, they "trade at meaningfully lower valuations than quite a few other parts of tech," as well as "industrials, beverages, medical tech, and the broad market."
Consolidation among chipmakers, Wick notes, has produced "significant cost synergies." Lastly, "chip stocks are highly correlated to economic growth globally," and "they tend to do well in a rising interest rate environment," as he tells Barron's.
Wick is not alone in his enthusiasm for chipmakers. "All signs point to yes for semiconductors," as Kim Forrest of Fort Pitt Capital told CNBC. Regarding Micron, CNBC points out that it is especially cheap, with a forward P/E ratio of only five times projected EPS.
Wick is impressed by Micron's ability to grow revenues at 50% or more annually, actually hitting 100% grow in recent years. He also notes that the company has increased its operating margin to the high 40% range, through increases in manufacturing efficiency. Also, the leading customers today for chipmakers such as Micron are high-margin businesses such as Alphabet Inc. (GOOGL), the parent of Google, and Facebook Inc. (FB). These customers "don't really quibble about the cost of memory" for their data centers, Wick tells Barron's.
Western Digital produces data storage devices, including mobile drives for PCs, notebooks, and computing gaming applications. Wick views it as half magnetic disk drives and half flash memory. A recent problem for Western has been softening prices for NAND flash memory devices, which do not require power to retain data. Wick finds the stock cheap at a P/E of about six times earnings, and notes that it generates significant free cash flow. Given his expectation that flash memory is on a trend to render magnetic disk drives obsolete, he tells Barron's that Western is more "future-proofed" than rival Seagate Technolgy PLC (STX), which is purely a magnetic disk company.
After a management change, Marvell's gross margin has increased from 51% to 63%, and its operating margin has increased from the low single digits to the high 20% range, per Wick. He calls it a "solid turnaround" that also has included the divestiture of unprofitable businesses, as well as the trimming back of wasteful R&D spending that was producing "a lot of dry holes."
Marvell's biggest business, at about 55% of revenues, is disk drive controllers, which has a gross margin of as much as 70%, per Wick. It also produces semiconductors and Bluetooth-type products for computer gaming applications. Wick likes the recent acquisition of Cavium Inc., which he calls "one of the best network processor companies in Silicon Valley."
Wick anticipates a "Microsoft-like revaluation" in Oracle, which has had "pretty solid" earnings from its "core database business." He tells Barron's that Oracle generates about $15 billion a year in free cash flow, and should be a big beneficiary of tax reform, which he estimates will add between 30 cents and 40 cents annually to EPS. He also projects that annual share repurchases could increase from about $10 billion to as much as $14 billion.