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In the last month, there’s been a big divergence in the semiconductor space.
While Advanced Micro Devices (NASDAQ: AMD) has risen more than 40%, other stocks in the space have struggled.
“This is a great example of the dispersion and the mixed trends that are occurring in the semi and semi equipment industry,” said Ari Ward, head of technical analysis at Oppenheimer.
The chipmaker space has experienced a slowdown in capital spending recently, which coincided with weakening NAND flash memory prices, as well as a decrease in spending among chip contract manufacturers. Chip stocks have been beaten down by investors worried about a cyclical downturn, as well as concerns about how the trade war with China will impact the industry.
However, the semiconductor sector is likely to continue to benefit from growing cloud data center spending, growth in the automotive chip space, and solid-state drive (SSD) adoption over the next few years.
With massive growth in these areas on the horizon, investors should look for bargains in the space and a few stocks are trading at relatively low multiples.
Here are two chip stocks that should be on your radar now.
Applied Materials (NASDAQ: AMAT)
Applied Materials (NASDAQ: AMAT) develops equipment, designs systems, and engineers materials for chip manufacturing and sells to the broader semiconductor space. Thus, AMAT gives broad exposure to the technology industry, from memory chips to OLED display technology.
Shares of AMAT peaked in March and are down 21% year-to-date. Looking at the chart, the price has formed a falling wedge pattern.
Watch for the price to break out of the upper trendline to complete the pattern. Considering that the price is nearing the 50% Fibonacci retracement of the stock’s climb from October 2016 through March 2018, I believe the price will fall to the $32 – $38 range before breaking out of this pattern and signaling a strong buy.
“We believe a combination of market share gain (a few percentage points share gain in silicon business of the next few years), incremental revenue opportunity, broader product portfolio, increased penetration with existing customers, increased wafer capital intensity at foundry/logic/memory, and exposure to the fast-growing display market will drive growth for AMAT over the next two to three years,” wrote JPMorgan analyst Harlan Sur.
The average twelve-month price target for AMAT is $61.86, indicating upside of nearly 54%. Credit Suisse Group has an Outperform rating on the stock with a price target of $75 – 86% higher than Thursday’s closing price.
Axcelis Technologies (NASDAQ: ACLS)
This lesser-known chip equipment play should be on your radar as it has strong exposure to both the DRAM and NAND markets.
Axcelis (NASDAQ: ACLS) designs, manufactures, and services ion implantation and other processing equipment used in fabricating semiconductor chips worldwide.
The company’s Purion product saw big demand in September 2017 which sent the stock soaring through October 2017. Since then, the stock has fallen precipitously. The correction since November 2017 has been a deep one, and shares have recently hit the 61.8% Fibonacci retracement level.
However, the company is strongly positioned in the market, and its recent launch of the Purion Power Series could give the company an expanded footprint in additional markets, which suggest renewed upside ahead.
“Power devices are one of the fastest growing segments in IC manufacturing, due to the robust e-mobility and renewable energy markets,” Axcelis’ executive vice president of customer operations, John Aldeborgh, said in a statement announcing the Purion Power Series. “Customer inquires and demand for Purion products serving this very active market have increased, driving significant opportunity for the Purion Power Series family of products.”
Axcelis is down nearly 34% year-to-date, but in its Q2 earnings report last month, the company posted earnings per share (EPS) of $0.43, beating analysts’ estimate of $0.35. The company had revenue of $119.30, beating analysts’ estimate of $116.33, and reported net margin of 28.57% and a return on equity of 16.84%.
All of the analysts covering ACLS have a Buy rating on the stock with a 12-month average price target of $30.60, suggesting possible upside of 60%. Last month, Benchmark set its price target for the stock at $32 – 67.5% higher than today’s price.