As the cyclical boom in the semiconductor business nears an end, picking stocks with longer-term secular growth stories has become increasingly important, UBS favors Intel Corp. (INTC) and is telling investors to shed high-flying chip stock Micron Technology Inc. (MU).
Analyst Timothy Arcuri started coverage on 14 semiconductor stocks on Thursday, noting that selection is critical to avoid being caught in a continued downturn. Arcuri highlighted companies he sees as likely to beat consensus earnings expectations or where analysts seem to be overlooking potential upside from a major business transition. Meanwhile, the analyst views a sell-off as particularly tough on memory stocks, which he advises investors to approach with more caution.
Initiating coverage on Intel stock at buy, Arcuri highlighted prospects in the chipmaker's data-center business and other undervalued parts of the company. INTC closed up 0.8% on Thursday, reversing an earlier decline following a bearish note from Stifel, which warned that Intel’s server chip cycle is winding down. Acuri stock picking has landed him in the #27 spot out of 4,756 analysts ranked on financial advice rating website TipRanks.
"Near term, INTC stands to benefit from a strong new data-center product cycle (Xeon Scalable) set against easy compares and a very favorable IT spending environment," wrote the UBS analyst. Arcuri sees the market as missing new growth opportunities around artificial intelligence (AI), which could "lift all boats," and not just that of NVIDIA Corp. (NVDA). (See also: Intel a ‘Top Pick’ Despite Poor Sentiment: Citi.)
"If data is the new oil AI is the combustion engine that will push more silicon into every vertical of the economy," wrote Arcuri. He also recommends buying Broadcom Ltd. (AVGO), Marvel Technology Group Ltd.(MRVL) and chip-equipment maker KLA-Tencor Corp. (KLAC).
UBS recommends selling Boise, Idaho-based memory chip leader Micron until prices cool off and allow sales to reach a steady state. While in the long run, a proliferation of AI-driven computing should work favorably for DRAM and NAND markets, in the near term "demand destruction has occurred because prices for DRAM and NAND both rose in C2017 by ~43% and ~14% year-over-year (YOY) respectively." Acuri contends that the industry will need to drive prices back down to access demand elasticity, especially in the large compute and storage markets. He also recommends selling memory-chip giant Texas Instruments Inc. (TXN). (See also: Micron to Gain on Strong NAND-DRAM Trends.)
UBS is lukewarm on shares of NVIDIA, Applied Materials Inc. (AMAT), Lam Research Corp. (LRCX), Advanced Micro Devices Inc. (AMD), Qualcomm Inc. (QCOM) and Skyworks Solutions Inc. (SWKS), citing a handful of risks including "growth/transformation already priced in." (See also: NVIDIA Burned on Plummeting Crypto-Prices, Analysts at Odds.)