If any segment has been known over the years as cyclical, it is the semiconductors, and with good reason. Peak to trough moves for the Philadelphia Semiconductor Index (SOX) have been dramatic, and the key for investors looking to be in has been to pick the right time to devote capital. Often that time is when earnings have bottomed, and sentiment is still lousy.
In a new research report, the analysts at RBC make the case that the SOX index cycle may have hit the trough when the market bottomed near the end of December. They concede that while there could be another quarter or more of flat to down movement, this gives investors a chance to start scaling in capital now, especially to secular growth and deep cyclical companies.
The RBC report noted this:
Although the Semis & Semi Equipment industry is not on our list of the most interesting industries, we remain intrigued for two reasons: (1) Valuations for the group are deeply attractive relative to the broader market on forward P/E (back down to 2015 lows) and are only back to neutral on EV/EBITDA. (2) The group looked deeply oversold by hedge funds as 2019 began, with positioning at a slight underweight and back down to past lows. The main risk we see is that sell-side sentiment does not yet look washed out.
These analysts are bullish on three top semiconductor companies, all of which are rated Outperform at RBC.
After years of frustrating performance, this top company appeared to have turned the corner, but it was absolutely destroyed in October and November. Advanced Micro Devices Inc. (NYSE: AMD) is one of the largest suppliers of PC microprocessors and graphics processors worldwide to computing original equipment manufacturers. The company’s main product lines include desktop, notebook and graphics processors, and embedded/semi-custom chips.
Last year the company released its first major offering in five years, the Ryzen chipset, which many feel is uniquely positioned to compete with the big players like Intel and Nvidia in the $50 billion total addressable market for personal computers, gaming, artificial intelligence and servers.
While last quarter’s earnings were somewhat disappointing, new catalysts could drive the shares, with AMD having a generational share gain opportunity. EPYC 2/Rome can leverage the software and qualification work started with EPYC 1, and most expect Rome to ramp in the second half of 2019. The new Vega GPU will be industry’s first at seven nanometers, and AMD is already annualizing $100 million or so in data center GPU sales, addressing a $10 billion potential opportunity.
The RBC price target for the shares is $34, while the Wall Street consensus target is much lower at $23.70. The shares closed Wednesday’s trading at $23.48.
This company has remained very resilient, and shares have surged since the December low. Cadence Design System Inc. (NASDAQ: CDNS) engages in the design and development of integrated circuits and electronic devices. Its products include electronic design automation, software, emulation hardware and intellectual property, commonly referred to as verification IP and design IP.
The company’s System Design Enablement strategy helps customers develop differentiated products — from chips to boards to systems — in mobile, consumer, cloud data center, automotive, aerospace, Internet of Things, industrial and other market segments.
Cadence Design recently released the ConnX B20 DSP, which provides a faster and more power-efficient solution for the automotive and 5G communications markets, including next-generation radar, lidar, vehicle-to-everything (V2X), user equipment (UE)/infrastructure and Internet of Things applications.
RBC has a $62 price target for the shares, and the consensus price objective is $59.01. Shares closed at $57.45 on Wednesday.
This semiconductor design stock is another Wall Street favorite and the top pick for 2018 at RBC. Synopsys Inc. (NASDAQ: SNPS) is the largest provider of electronic design automation (EDA) software used to design, verify and layout semiconductor chips and electrical systems.
Synopsys represents roughly 28% of the $5 billion EDA market and is the market leader in digital synthesis (Galaxy product) as well as the largest EDA provider of intellectual property for common interconnects like USB. Synopsys continues making inroads into the analog space with the launch of its Galaxy Designer product.
RBC sees the company a winner as research and development spending continues to surge in 2019. With Synopsis a big player in the EDA market, this looks to be a strong tailwind for the company.
The whopping $130 RBC price target is higher than the $117.43 consensus target. The shares closed at $102.64.
Even if the bottom of the cycle isn’t 100% in, it should be close, and these three companies have done very well regardless. RBC is staying with top companies that the firm has followed and remained positive on for years.