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Micron and 3 Other Semiconductor Stocks Poised to Shine in Q2

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The first quarter of 2018 was a bumpy ride for the technology sector, thanks to the slew of bad news, which includes the Russian hacking of computers at the 2018 Olympics, data misuse scandal at Facebook , and the first casualty by a driverless car. This has come as a massive blow to the share prices of tech heavyweights, including Facebook, Apple and Alphabet, dragging the entire sector down.

However, in the technology sector, semiconductors remained the most stable industry. During first-quarter 2018, iShares PHLX Semiconductor ETF (SOXX - Free Report) gained 6.1% as against the Technology Select Sector SPDR ETF’s (XLK - Free Report) return of just 2.3%.

The semiconductor industry has been benefiting from the rising demand for chips used in cloud-based platforms, Artificial Intelligence (AI) tools, Augmented/Virtual (AR/VR) reality devices, autonomous cars, advanced driver assisted systems (ADAS), as well as Internet of Things (IoT) related software and hardware.

Higher demand for chips, sensors, RFID, etc has been driving the top-line growth of various well known semiconductor companies. This, in turn, is boosting investors’ confidence as reflected in the companies’ share-price movement.

Additionally, the U.S. chip-equipment makers’ earnings and cash flow are likely to get further boost from Trump’s business-friendly tax-cut policies. The tax reform will make semiconductors repatriate significant amount of cash held abroad and eventually drive after-tax earnings. Chip makers can also use this extra cash for research and development, and mergers & acquisition activities.

Therefore, it is wise for investors to have some semiconductor stocks in their portfolio which have potentials to provide better returns in highly volatile situations.

Micron: One of the Best Choices

Micron Technology, Inc. (MU - Free Report) turned out to be one of the best performers in the semiconductor industry in the first quarter of 2018. The company’s shares have appreciated nearly 26.8% during the period, a much better performance than the iShares PHLX Semiconductor and Technology Select Sector SPDR ETFs.



The outperformance can be primarily attributed to Micron’s robust revenue and earnings growth, as well as expanding margins. We note that the company posted positive earnings surprise of 8% in the trailing four quarters.

We believe the company will continue its stellar growth performance in the quarters ahead. The optimism surrounding the stock comes from the fact that the DRAM market is still witnessing a huge demand-supply gap which is escalating prices.

It should also be noted that as Micron generates nearly 70% of its revenues by selling DRAM products,the company is the biggest beneficiary of this supply shortage. In the last reported quarter, sales from DRAM products witnessed a whopping 76% year-over-year increase.

Micron, which sports a Zacks Rank #1 (Strong Buy), has also witnessed significant earnings estimate revision in the last 30 days. The EPS estimate for the current quarter moved up 4% (11 cents) to $2.84 per share during the same period.

3 Other Stocks in Focus

Apart from Micron, there are few other semiconductor stocks that have the potential to outperform in the current quarter. These stocks sport a Zacks Rank #1 or #2 (Buy), and have witnessed significant estimate revisions.

Another semiconductor stock which is in our list of favorites is NVIDIA Corporation (NVDA - Free Report) . Although recent developments like suspension of test drives for all its driverless vehicles and a likely sluggish demand from cryptocurrency miners has dented stock price, we believe they have least impact on the company’s financial performance.

Although tests have been suspended, vehicle makers will continue to invest in making driverless cars safer. This keeps the demand for NVIDIA’s chips unaffected. Moreover, sales generated from cryptocurrency miners contribute a meager part to the company’s overall revenues, therefore any slowdown in demand will have no material impact.

Furthermore, last month Uber’s driverless vehicle test incident has once again pressed the need for safer technologies, which NVIDIA is capable of offering. The company recently unveiled the Constellation driving simulator which enables companies to test self-driving systems in a virtual environment.

Although NVIDIA doesn’t expect the new simulator to fully replace real-world testing of self-driving cars, the number of trials will likely come down, significantly. We believe the latest simulator will enhance NVIDIA’s competitive position in the self-driving car market space, particularly against chip makers, like Intel and Advance Micro Devices.

NVIDIA flaunts a Zacks Rank of 1 and has surpassed the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 40.8%. The company has witnessed sharp upward estimate revision in the past 60 days. The EPS estimate for the current quarter increased 51.5% (51 cents) to $1.50 per share during the same time frame. The stock rallied 19.7% in the first quarter. You can see the complete list of today’s Zacks #1 Rank stocks here.



The next stock in our radar is Applied Materials, Inc. (AMAT - Free Report) . Applied Materials’ market share has gained significantly with its strength in 3D NAND and DRAM. Management expects increasing DRAM and logic spending in 2018. The prevailing demand-supply gap for DRAM will continue to benefit the company throughout this year.

This Zacks #2 Ranked company has surpassed the Zacks Consensus Estimate in the preceding four quarters, with an average positive surprise of 4.8%. The EPS estimate for the current quarter increased 13% (13 cents) to $1.13 per share during the same time frame. The stock has gained 8.8% in the first quarter.



Our next pick is Lam Research Corporation (LRCX - Free Report) . The company is anticipated to benefit from the improving WFE market, elevated demand for server DRAM and increased adoption rates of 3D NAND technology in the near future. This is driven by cloud computing, big data, mobile devices and IoT. The company has undertaken cost-reduction activities, and density scaling for 3D NAND and new memory technologies.

The company, which carries a Zacks Rank of 2, outpaced the Zacks Consensus Estimate over the past four quarters with an average positive surprise of 9.2%. The stock has ascended 10.3% in the first quarter.



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