Chip stocks have had a strong year despite the Covid-19 pandemic. Analysts at Mizuho Securities think there are more gains to come, powered by growth in next generation smartphone technology, a return to strength among auto makers, and an improving global economy.
The PHLX Semiconductor index has gained nearly 50% in 2020, vastly outperforming the S&P 500 and other indexes, but next year is still ripe with opportunity, Mizuho chip analyst Vijay Rakesh wrote in a client note Monday. Based on historical trends that Rakesh compiled, chip stocks have outperformed gross domestic product growth in every year over the last 20 that wasn’t subject to an economic downturn.
In a typical year, the PHLX outperforms global GPD growth by 21 percentage points, while revenue of companies in the index beat global output by 10 percentage points.
Beyond a recovering global economy, the Mizuho team predicts that the automotive industry will grow roughly 14% in 2021, after a sharp decline amid the coronavirus pandemic, coupled with factory shutdowns. Companies that make chips for autos stand to benefit because more vehicles use driver assistance systems and are electric. Both technologies require more chips per vehicle.
Auto chip makers are also likely to get a boost from the Biden administration’s proposed energy and climate policy, which includes adding 500,000 charging stations for electric vehicles. More charging stations could mean more people willing to buy electric cars.
Rakesh raised his target price for auto chip maker On Semiconductor (ticker: ON) to $36 from $34 and upped his target price on Allegro MicroSystems (ALGM) to $30 from $28. Both companies are potential acquisition targets within the auto industry, Rakesh wrote.
Meanwhile, the development of 5G wireless technology has brought faster, broadband-like speeds to cellphones and other internet connected devices around the world and a fresh reason for consumers to upgrade their handsets. Because of how 5G technology operates, new flagship phones need roughly 20% more radio frequency chips, Rakesh wrote, while mass-market phones use 40% to 50% more radio frequency, or RF, chips.
More RF chips will benefit several of Rakesh’s other chip favorites, including Qualcomm (QCOM), Broadcom (AVGO), and Skyworks Solutions (SWKS)—all of which have a Buy rating from the analyst.
Handset strength could power another chip company to a strong 2021 too: Micron Technologies (MU) stands to benefit from the increasing amount of memory in next-generation phones, and a bottoming in the price of dynamic random access memory, Rakesh wrote. Memory is a commodity, much like oil and gold, and an oversupply of such chips hurt companies in 2020. Rakesh raised his target price on Micron to $85 from $75.
Rakesh also includes Nvidia (NVDA) on his list: “While the valuation is relatively high, we believe NVDA is the leader in data center acceleration, and AI which is still in its infancy in a potential $100B market.”
Rakesh is less enthusiastic about the stocks of companies that produce hardware to power 5G base stations because demand in China is slow, and there is little investment from U.S. carriers other than Verizon (VZ).
Write to Max A. Cherney at max.cherney@barrons.com
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