Shares of chipmaker Broadcom Ltd. (AVGO), which is reasonably priced and posting strong growth, should outpace industry darling Nvidia Corp. (NVDA) as the industry's revenue growth peaks, according to Angelo Zino, senior industry analyst at independent research firm CFRA, as reported by Barron's. He says that Broadcom is "among the most attractively valued chipmakers given its diversified end-market mix, potential upside to consensus estimates, and free cash flow potential." In particular, he notes that Broadcom is a major supplier to manufacturers of mobile devices, and the next iPhone release should produce a significant increase in sales.

Attractively Valued

Broadcom currently trades at a forward P/E ratio of 14.7, slightly above its respective three-year and five-year historical averages of 13.3 and 13.1, Zino tells Barron's, basing his analysis on Capital IQ consensus estimates. Nonetheless, Broadcom's multiple is 19% below that for the S&P 500 Index (SPX) and 22% below that for the S&P 500 Technology Sector Index (S5INFT), he adds. Broadcom also has the ability to generate a long-term free cash flow margin of 35%, the best among its peers, Zino says. It also has the ability to nearly double its dividend by the end of the year.

Meanwhile, the forward P/E for Nvidia is a very rich 40.9, and well above its three-year and five-year averages of 21.5 and 18.5, Zino indicates. While Nvidia is well-positioned, given the growing demand for its graphics processing units (GPU), he cites analysis by CFRA suggesting that Nvidia is "likely to trade range bound and multiple compress amid a lower overall growth environment."

Growth Slowdown

Shares of chipmaking stocks have been on a tear over the past two years, leading to concerns about overvaluation. One widely-used barometer, the PHLX Semiconductor Index (SOX), is up 98% from its close on August 25, 2015 to its close on September 6, per Yahoo! Finance. Zino, however, tells Barron's that "valuations remain healthy and actually reside slightly below historical levels." He bases this observation on historical analysis of forward P/E ratios for a basket of the 25 largest semiconductor stocks.

While valuations remain healthy right now, the big problem is that CFRA expects revenue growth rates in the semiconductor industry to decelerate sharply, from a range between 15% and 20% during the last four quarters – the best in more than six years – to low-to-mid-single digit levels in the first half of 2018. Zino notes that historically there has been a strong correlation between growth rates and stock valuation multiples for the semiconductor industry, and this suggests that multiples will fall to the lower half of their historical ranges.

One impediment to semiconductor industry growth is the rising prices of chips, according to research by JPMorgan Chase & Co. (JPM) cited in another Barron's article. The JPMorgan report anticipates that, as a result, the next iPhone release from Apple Inc. (AAPL) will be significantly more expensive than previous models, thereby denting consumer demand. This, in turn, will reduce sales of key components, most notably chips.

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