Semiconductor stocks were top performers in 2019, but Bank of America analyst Vivek Arya said Friday he remains bullish on top semis in 2020 as well.
Arya listed four reasons he remains a semi stock bull this year:
- After a 13% revenue drop in 2019, Bank of America is targeting 7% semiconductor revenue growth in 2020.
- Semis have high exposure to 2020 tech megatrends, such as 5G, cloud computing, artificial intelligence, Internet of Things, and electric and autonomous vehicles.
- Trade tensions between the U.S. and China have eased, and global supply chains are balanced.
- Fund managers are currently overweight semis stocks by 1.2 times the overall S&P 500, well below their peak weighting of 1.36 times in March 2017.
Arya likes Nvidia and Inphi specifically because of their exposure to the high-growth cloud computing market. He is forecasting between 15% and 20% sales growth for both companies in 2020 and said both should have margin expansion opportunities as well.
“Our top US semis large-cap pick is NVDA due to its industry leading 15%+ sales CAGR 2019-2021E; its high exposure to our preferred areas of AI, High Performance Computing, Gaming, Autos, 5G; and the upcoming release of its next-gen 7nm GPU just in time for the ramp in natural language processing (NLP) services that require
100x compute,” Arya wrote in a note.
In addition to naming Nvidia and Inphi his top picks, Arya adjusted his ratings and price targets for a handful of other semis as well. Here are some of the key changes:
- Applied Materials, Inc. (NASDAQ: AMAT) upgraded from Neutral to Buy, price target raised from $64 to $71.
- Lam Research Corporation (NASDAQ: LRCX) upgraded from Neutral to Buy, price target raised from $275 to $350.
- Microchip Technology Inc. (NASDAQ: MCHP) upgraded from Neutral to Buy, price target raised from $110 to $130.
- Xilinx, Inc. (NASDAQ: XLNX) downgraded from Neutral to Underperform, price target lowered from $105 to $100.
- Advanced Micro Devices, Inc. (NASDAQ: AMD), reiterated at Buy, price target raised from $52 to $56.
If growth stocks continue to shine in 2020, investors can rest assured semiconductor stocks will be among the market leaders by year’s end. If, however, investors finally begin to rotate from growth stocks to value stocks, semis may struggle to repeat their 2019 performance given their group forward earnings multiple is already above 20.
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