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6 Stocks Poised to Gain From Uptick in Chip Design Activity

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According to latest data from Semiconductor Industry Association (SIA), worldwide sales of semiconductors increased 4.9% in August on a year-over-year basis to $36.2 billion. Further, sales in August were 3.6% higher than the July total of $35 billion. Moreover, sales into the Americas remained strong in August, reflecting an increase of 23.6% year over year.

Microchip demand is also likely to get a boost with the 5G boom in Europe and parts of Asia, including China and Singapore. IDC expects 5G volumes to grow this year, which should act as a tailwind to the semiconductor market.

In fact, per World Semiconductor Trade Statistics data, worldwide sales of semiconductors are projected to hit $426 billion in 2020, reflecting a year-over-year improvement of 3.3%. Also, the global semiconductor market is projected to grow 6.2% in 2021.

Factors Driving the Need to Design Robust Chips

The projected increase in semiconductor sales authenticate the momentum in chip design activity. Markedly, the global semiconductor industry, which plays a crucial role in the high-growth technology space, has been relatively less battered by the coronavirus pandemic.

As economies reopen; increasing proliferation of IoT devices, including sensors, smart device and proximity awareness applications, to aid people resume work, school, and other activities amid the social distancing norms, remains noteworthy. This, in turn, will further boost the need to design robust chips to meet the evolving standards.

Amid the backdrop of 5G and cloud computing boom induced by the new normal lifestyle, semiconductor manufacturers are looking to design AI-embedded robust inference chips. Growing clout of high-speed networking, smartphone processors, and high-performance data center applications, further enhances the necessity to deliver advanced chips.

These factors are driving the demand for electronic design automation (EDA) software, simulation software, electronic design, test instrumentation systems, 5G network emulation solutions, and semiconductor device fabrication process offerings.

Moreover, momentum in high performance computing (HPC) applications, gaming, wearables, drones and VR/AR devices is fueling massive growth in the semiconductor space. This can primarily be attributed to the coronavirus crisis, which has led to increase in usage of online services globally.

Further, evolution of semiconductor manufacturing processes from 10 nanometer (nm) to 7 nm and even 5 nm technology is opening new business avenues.

This brings our focus to six stocks that are well positioned to gain in the current scenario:

Year-to-Date Price Performance

Advanced Energy Industries (AEIS - Free Report) is benefiting from strong momentum across semiconductor equipment, and data center verticals.

Particularly, solid demand for the company’s power solutions in advanced semiconductor applications, is driving its semiconductor product revenues. Moreover, increasing investments in complex 3D NAND devices, DRAM, and foundry and logic remains a tailwind for this Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for current-year earnings has been revised upward by 7.7% in the past 30 days to $4.33 per share.

Applied Materials (AMAT - Free Report) is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules.

This Zacks Rank #2 (Buy) company is set to gain from strength in semiconductor equipment demand. Further, increased customer spending in foundry and logic on the back of rising need for specialty nodes in IoT, communications, automotive and sensor solutions remains a positive.

The Zacks Consensus Estimate for fiscal 2020 earnings has improved 6.8% over the past 60 days to $4.07 per share.

Keysight Technologies (KEYS - Free Report) is gaining from strong presence in the 5G network emulation market. Collaborations with Qualcomm, Xilinx and AT&T, and notable acquisitions including Ixia, Anite and AT4 Wireless have enhanced Keysight’s 5G test solutions portfolio.

The company is well poised to gain from solid demand of its semiconductor measurement solutions as semiconductor companies look to develop chips based on next-generation process technologies.

Also, improving supply chain management, uptick in 5G chip design solutions on accelerated 5G deployment, and demand recovery across Asia boosts the company’s business prospects.

Notably, the Zacks Consensus Estimate for fiscal 2020 earnings has been revised upward by 12.2% in the past 60 days to $4.70 per share. Keysight currently carries a Zacks Rank #2.

Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) , the world's largest dedicated integrated circuit foundry, is well poised to capitalize on 5G boom on strength in its robust 7 nm and 5 nm production processes.

Momentum in new 5G smartphone launches, persuaded the company to raise outlook for 5G smartphone penetration rate to high teens in 2020. The company, currently carrying a Zacks Rank #3 (Hold), anticipates solid uptick in 5G and HPC related applications to bolster semiconductor content enrichment through 2020.

The consensus mark for current-year earnings of $3.14 per share indicates growth of 46.1% on a year-over-year basis.

Synopsys (SNPS - Free Report) is benefiting from robust growth in software-based verification at both traditional semiconductor and emerging system companies focused on own in-house design.

Notably, Fusion Design Platform, launched last November, is witnessing high demand, which is helping it drive robust results. The company’s Verification Continuum platform steadily witnesses excellent demand and competitive wins. Further, ZeBu Server 4 product is generating a broad-based adoption by customers’ designing storage, networking and AI chips.

The company, currently carrying a Zacks Rank #3, also announced the acquisition of Qualtera, a provider of collaborative high-performance, big data analytics for semiconductor test and manufacturing, to address the momentum in semiconductor end-market.

The consensus mark for fiscal 2020 earnings has been revised upward by 5.3% to $5.55 per share in the past 60 days.

Cadence Design Systems (CDNS - Free Report) continues to invest heavily in verification and digital design products, which is helping it to launch products that address the ever-growing needs of semiconductor companies. It is focusing on providing end-to-end solutions, which rapidly reduces the time required to introduce a semiconductor product in the market.

We believe that the launch of new products like Protium X1, Spectre X, Smart JasperGold and Tensilica Vision Q7 and Xcelium, which have already been selected by new customers like NVIDIA, Xilinx and Mellanox (now acquired by NVIDIA), will drive the top line.

Further, Cadence has expanded its partnership with Micron to ramp up the development of the latter’s next-gen products. Solid adoption of Palladium Z1 on the back of strong demand for growing hardware capacity remains a positive for this Zacks Rank #3 company.

The consensus mark for 2020 earnings of $2.55 per share indicates growth of 15.9% on a year-over-year basis.

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