You wouldn’t know it by looking at stock prices, but chipmakers have had a difficult year in 2019.
The VanEck Vectors Semiconductor ETF is up nearly 39% so far this year, outpacing both the S&P 500 and the Nasdaq.
However, semiconductor companies, especially those that get a significant amount of their revenues from China, have been up against major headwinds in 2019 as the trade war has heated up, China’s economy has slowed, and demand for chips has weakened.
Despite this, investors have been betting on these stocks ahead of 2020 when the 5G network begins to roll out, which should spur demand for chips and deliver a big pay-off for 5G-related stocks.
The shift to 5G will result in a huge leap in connectivity and speed, which will benefit those companies that are involved in the roll out of the new technology.
“What’s being priced into these stocks is a rebound next year,” said Edward D Jones & Co analyst Logan Purk.
Of the three, Micron is up the most at a gain of 57% so far this year. Goldman Sachs said this week that Micron is a buy ahead of its earnings release on September 26.
Micron could see a bump in sales as the rise of 5G increases demand for memory storage. The chipmaker is a leader in the NAND semi market. NAND is the flash memory found in smartphones and solid-state hard drives.
Goldman’s Mark Delaney reaffirmed his Buy rating on the stock on Tuesday, and believes Micron will deliver solid fiscal fourth-quarter results. The analyst boosted his price target for MU to $59, indicating 18% upside over the next 12 months.
Delaney said he expects “results and guide slightly above the Street,” and said that Micron’s “fundamentals [are] picking up,” even as some headwinds remain.
Qualcomm, which is up just over 37% year-to-date, has historically won big when new networks roll out, according to Canaccord Genuity senior equity strategist Michael Walkley. And Walkley says the roll out of 5G won’t be any different.
“5G is a catalyst for Qualcomm,” Walkley said. He rates QCOM a Buy and recently set a price target on the stock of $87 – 11% higher than Thursday’s closing price.
Rosenblatt Securities’ Jun Zhang also has a Buy rating on Qualcomm and said of the company, “As the industry upgrades from 4G to 5G, that helps Qualcomm in winning some market shares. The 5G cycle benefits Qualcomm.”
Broadcom has been outpaced by our other two chip stocks, and is up just 14% so far this year.
Wall Street was confused by Broadcom’s acquisition of CA Technologies last year, but the acquisition could prove to be a smart decision in the long-run.
When Broadcom first bought CA Technologies, stock prices fell. But the merger has helped to diversify the company beyond chips and into software services, which could help it better capitalize on the rise of 5G.
“It helps Broadcom stand apart,” Purk said.
Bernstein analyst Stacy Rasgon reiterated his Outperform rating for Broadcom this week, citing the stock’s attractive valuation. Rasgon said Broadcom will also benefit from several product cycles, including design wins in Apple (NASDAQ: AAPL) products. Rasgon set a price target for AVGO at $340 – 17% above the current price.