Semiconductor Watchlist: Micron, Nvidia Applied Materials


The benchmark PHLX Index (SOX) started at 3,432 this week, up 9.1% over the prior week. The SOX remains down 14% on a year-to-date basis.

The week saw a number of major semiconductor funds rising at least 10% in value, including the VanEck Semiconductor ETF  (SMH) – Get VanEck Semiconductor ETF Report  and the Invesco Dynamic Semiconductors ETF  (PSI) – Get Invesco Dynamic Semiconductors ETF Report A+ (B-). That compared favorably with big index funds like the Vanguard 500 Index ETF  (VOO) – Get Vanguard S&P 500 ETF Report A+ (B), which rose by 6% for the past week.

Now, after weeks of market distress, some trading experts see a rising investor opportunity with semiconductors.

“Technology stocks have felt the brunt of the market correction over the past few months,” wrote TheStreet’s Todd Campbell. “Sell-offs can feel horrible, but there’s a flip side. They can create opportunities for investors to buy stocks at more reasonable prices. The challenge is knowing what stocks to buy and when to buy them.”

Since the Federal Reserve’s easy-money tailwinds are over, it may still be best to be skeptical of high-valuation stocks like software. Campbell says that instead, lower valuation technology stocks with earnings growth and secular tailwinds, such as semiconductor stocks, could be a better bet.

“Yes, the industry is cyclical, but the electrification of everything supports demand, and, in the case of semiconductor equipment, a renewed focus on production redundancy is bullish,” he said.

A big component to industry growth is the billions of dollars flowing into new manufacturing production.

“The European Union will spend $48 billion between now and the end of the decade to re-shore as best it can the semiconductor industry,” Campbell said. “The goal set out by the European Chips Act is to have 20% of global semiconductors produced in Europe by 2030.”

Just last Tuesday, chip giant Intel (INTC) announced it would invest $88 billion in Europe over the coming decade to increase production there, including building a $19 billion mega-fab in Germany, with construction beginning next year.

It’s not all about Europe, either.

“Only about 10% of global chip production is in the United States, so it’s particularly susceptible to supply risks,” Campbell said. “To help change that, Intel is investing $20 billion on two new plants in Arizona. The move will allow it to better compete in a foundry market worth an estimated $100 billion in 2025.”

Additionally, legislation is also winding through Washington that could provide additional money to the industry for new capacity. The CHIPS Act, which is gaining steam in Congress, would provide chipmakers with $52 billion in subsidies for chip manufacturing in the U.S.

What’s the smart play with semiconductors?

Campbell observes patience really is a virtue with chip stocks, and that steering cash gradually into the sector is the way to go.

“Semiconductor stocks are historically cyclical, making them prone to booms and busts,” he said. “However, countries and companies are spending heavily to overcome supply disruptions and sidestep geopolitical threats, and technological advances, including AI, machine learning, and automation, offer secular demand tailwinds, which could smooth out some of its cyclicality.”

The industry hasn’t yet escaped this year’s selloff, but that’s not necessarily bad if you’re an investor with cash on the sidelines.

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“Many top stocks are down sharply from their peaks, including Applied Materials and Nvidia, which have dropped 20% and 25%, respectively,” Campbell added. “Of course, there are no rules stocks must trade back up to past levels, but stocks tend to follow earnings over time, and growing demand suggests their earnings will head higher.”

Overall, investors may want to smooth out their average cost by dollar-cost averaging into semiconductor stocks or ETFs over the next year.

“Doing so could be an intelligent way to minimize risk if the market continues falling because of slowing economic growth due to the Federal Reserve’s efforts to tame inflation,” Campbell said.

In the meantime, TheStreet’s trading specialists are looking at these semiconductor stocks this week.

Applied Materials AMAT $135.41. 5-day performance 9.30%. 

Global semiconductor equipment giant Applied Materials  (AMAT) – Get Applied Materials, Inc. Report is one company Campbell believes could enjoy a “demand tailwind” thanks to the uptick in semiconductor industry spending.

“One of AAP’s holdings, the company is one of the world’s largest suppliers of tools used to produce semiconductors, ranging from patterning systems to quality assurance to packaging multiple chips,” he said. “As a result, its forward growth should benefit nicely from the growing complexity of smaller, more powerful chips and global investment in supply redundancy.”

Last quarter, the revenue grew 21% year-over-year to $6.3 billion, and analysts expect earnings per share to reach $9.48 in 2023, up from $4.17 in 2020. Applied Materials shares trade at a forward price to earnings, or P/E, ratio of 14, so investors aren’t paying through the nose to buy shares.

“The company’s P/E has ranged between 7 and 32 over the past five years, and it’s beaten analysts’ earnings estimates in 14 of the past 15 quarters,” Campbell said.

AMAT shares rose by 3.6% early on Friday, March 18 – that after Applied Materials boosted its repurchase authorization and hiked its dividend by 8.3%. The firm’s new stock buyback program number of $6 billion also helped lift shares, as did its move to raise its quarterly dividend from 24 cents to 25 cents, payable on June 16.

Nvidia NVDA $265.53. 5-day performance 19.70%.

Semiconductor company Nvidia  (NVDA) – Get NVIDIA Corporation Report will host its Annual Investor Day on March 22. On that day, Nvidia investors can expect to get a clearer look at the company’s initiatives and the progress of its growth in its core markets.

“Last year’s Annual Investor Day resonated well with Nvidia shareholders,” TheStreet’s Bernard Zambonin reported. “The stock soared over 3% after the event and coincidentally leveraged a super-rally of nearly 120% to an all-time high in late November 2021.”

However, with Nvidia shares currently nearly 95% higher compared to the same period last year, is it possible the stock could undergo a similar rally after this year’s event?

Zambonin says that industry analysts seem to think so.

“Wells Fargo analyst Aaron Rakers — who recently added Nvidia to his “signature pick” list — believes that the company will expand its software-only offering, upgrade the longevity of the GeForce Gaming GPU, and also expand its auto pipeline,” Zambonin said. “Rakers thinks the day’s events could lead analysts to forecast earnings per share of between $9 and $10 by 2024.”

Overall, the Wall Street consensus is super-bullish on Nvidia stock. “Based on the latest ratings provided by analysts over the last three months, Nvidia is a strong buy and its median price target is $352,” Zambonin added. “That would reflect an upside of more than 40%, considering NVDA’s March 17 price at $246.55.”

Other analysts are in the same ballpark.

“Prior to the Investor Day event, Cowen analyst Matt Ramsay has estimated Nvidia stock’s fair price to be $350, indicating an upside of more than 40%,” Zambonin noted. “According to Ramsay, the recent pullback in the stock is a good opportunity for investors for the long term. He considers Nvidia to be “the industry’s best open-ended AI driver growth story.”

Campbell believes that Nvidia should be one of the biggest beneficiaries of increased chip demand.

“Nvidia made its industry chops by developing faster graphics chips for gaming,” he said. “Recently, it’s been leveraging that expertise to target the artificial intelligence, data science, robotics, augmented reality, and automotive systems markets.”

Last quarter, Nvidia’s revenue jumped 53% year-over-year to $7.6 billion, and analysts expect its earnings per share to increase to $6.65 in fiscal 2024, up from $2.50 in fiscal ’21. That’s more than a doubling in three years, Campbell noted.

“Admittedly, investors will have to pay for that growth,” he said. “Nvidia’s forward P/E ratio is nearly 40. Nevertheless, it has a solid history of under-promising and over-delivering on the bottom-line, outpacing analysts’ earnings estimates in 13 consecutive quarters, so paying up to own it might be okay.”

Micron Technology MU $79.55. 5-day performance 9.05%. 

Chip maker Micron Technology  (MU) – Get Micron Technology, Inc. Report has seen some big up and down swings in recent weeks in reaction to global events and analyst actions.

Now, TheStreet’s Bruce Kamich is checking out the charts to see if MU might see calmer action in the future.

“In our daily bar chart of MU, we can see a number of rapid up and down swings over the past several months,” he said. “Buy and hold investors have probably had some sleepless nights and even number traders have probably been challenged. Prices are below the declining 50-day moving average line but are testing the underside of the flat 200-day moving average line.”

Additionally, Micron’s On-Balance-Volume (OBV) has slowly turned lower from the middle of February telling us that traders have become more aggressive sellers, and its Moving Average Convergence Divergence (MACD) oscillator is bearish.

More research notes MU Prices have traded sideways for more than a year. “MU is below the 40-week moving average line and the weekly OBV line has been weak since last March,” Kamich said. “The MACD oscillator made a lower high this year versus last year even though prices made a slightly higher high. This is a significant bearish divergence. The oscillator is pointed down and near the zero line.”

In reviewing his charts, Kamich sees a potential downside price target of $54.

“In the short-run, trading in MU could remain unsettled,” he said. “The key area I am watching is the October low – hopefully prices can rebase above it.”

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