Semiconductors have had a rough go of it lately. While this week’s surge on the hopes of a possible trade deal between the U.S. and China has lifted the group, chipmaker stocks haven’t been able to escape correction territory.
Since hitting a record high back in April, the SMH Semiconductor ETF has sunk -12% as the trade war has raged on.
But technical analyst Mark Newton at Newton Advisors believes the sector could soon see some relief.
Newton says there have been “signs that this group is starting to stabilize and turn back higher even though a deal has not been done yet. In the last few weeks, we’ve seen evidence that it was going to break out, pull back, and then [Monday] moved to the highest level we’ve seen in the last four or five days.”
“This is a very bullish move on a short-term basis that leads me to think that this sector is starting to outperform, not only winning the broader group but also within the broader index,” Newton continued. “So you can see a further bounce in this group right up to levels right near 1,500 or so on the SOX,” referring to the Philadelphia semiconductor index.
According to Newton, the pullback seen in the sector recently “is likely going to turn out to be a buying opportunity into the summer and fall before you see any broader peak.”
With the sector still under pressure, Mark Tepper, president and CEO of Strategic Wealth Partners, says investors should be selective.
“This is where you look for companies that fit secular themes that you want to be a part of, themes you want to play, so you find them, you wait for them to fall into your lap at a price that makes sense,” Tepper said.
Tepper likes chipmaker Nvidia (NASDAQ: NVDA). Nvidia has been beaten down over the last year and is down nearly -42% over the last twelve months. However, things have perked up this week and the stock is now up 4%.
“With Nvidia, you’re getting best-of-breed exposure to all the highest growth end markets that we want to play – autonomous vehicles, AI, data center, gaming,” Tepper said. The stock is now trading at $154, but Tepper says “it looks really nice in the $135 to $140 range. You might even be able to get it at around $125, and it’s just a no-brainer at that level.”
Morgan Stanley likes another stock in the space. It recently upgraded Advanced Micro Devices (NASDAQ: AMD) as the company keeps delivering “positive proof points.”
The bank upgraded the stock from underweight to equal weight and raised their price target to $28 from $17, and said that AMD has consistently performed well compared to competitors.
“Being cautious on the stock has obviously been the wrong call, even though we were right on some aspects,” Morgan Stanley analyst Joseph Moore wrote in a note. “While our earnings concerns over the last 12 months have played out… the table is set well for 2020 and there are positive near-term catalysts.”
Moore believes cloud gaming will continue to be a key catalyst for AMD. He says the company has continued to find creative ways of “monetizing a graphics chip that still appears to lag behind Nvidia’s state of the art” chips.
Between the two, analysts say NVDA has more upside potential. Their average price target for the stock is $198.87, suggesting possible upside of nearly 30% over the next twelve months.