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Thursday, February 28, 2019 9:45:37 AM
By: 24/7 Wall St. | February 28, 2019
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.
AMD
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.
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