Chip stocks’ massive rally is continuing to roll on.
So far this month, the SMH VanEck Semiconductor ETF is up more than 7%, triple the gains seen in the broader tech sector.
But fundamentally, 2019 has been a challenging year for semis. Industry revenue, excluding the memory sector, will be down 6% to 8% for the full year. That’s a far cry from last year’s 8% growth.
The rally seen in the sector this year points to anticipation for better fundamentals ahead for chip stocks, a recovery JPMorgan analyst Harlan Sur says will drive the group higher.
Year-to-date, the SMH is up 62.84%, far outpacing the 27.7% return of the S&P 500 and the Nasdaq’s 33.3% gain.
Sur wrote in a note this week that the average semi stock could see 15% to 20% gains over the next 12 to 18 months, and projects revenue growth for the overall industry to grow 4% to 7% and profits to grow 8% to 12% next year.
“We see strength in mobile, gaming, datacenter, and PCs with industrial demand trends likely to improve in 2020 – overall driving a positive year-over-year cyclical inflection in industry growth,” beginning in the first half of 2020, Sur wrote. “Longer erm, we continue to expect the semiconductor industry to exhibit relatively stable and less cyclical growth characterized by low- to mid-single-digit percentage annual revenue growth and high single-digit percentage unit growth.”
As for the stocks in the space Sur likes, his top pick is Broadcom (NASDAQ: AVGO) for what he calls its “under-appreciated diversification,” strong free cash flow, and dividend growth. For data center exposure, Sur has his eye on Intel (NASDAQ: INTC), Micron (NASDAQ: MU), and Nvidia (NASDAQ: NVDA).
Sur also likes Marvell (NASDAQ: MRVL) and Qorvo (NASDAQ: QRVO) for plays on the rise of 5G, and likes Microchip Technology (NASDAQ: MCHP) and Texas Instruments (NASDAQ: TXN) for improving industrial demand.
The JPMorgan analyst isn’t the only one bullish on chip stocks.
Oppenheimer’s Ari Wald says the charts in the semiconductor space are pointing to more gains ahead.
“They are signaling to stick with semis. This is one of our favorite market areas,” Wald, Oppenheimer’s head of technical analysis, said. “Not only does it rank high in our momentum work, it’s really broad-based across the board. That’s what we’re looking for. It’s the whole group working.”
Wald is bullish on Microchip Technology and said that the stock is “not as extended as some of its peers,” and said that it’s “just starting to break out.”
Nancy Tengler, chief investment officer at Laffer Tengler, told CNBC that her firm “expressed commitment to the sector by overweighting Broadcom and Texas Instruments” at the end of last year, but now she’s got her eye on a different stock in the sector.
“Micron looks really interesting here despite the big run-up recently,” Tengler said. “It’s underperformed for the last five years. … I think the company is well positioned as we move forward.”
Overall, Wall Street is most bullish on Broadcom, Micron, and Marvell shares, with consensus price targets indicating 10.86%, 16.03%, and 13.24% upside, respectively, over the next twelve months.