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Chip Stocks Offer Upside Even After Red-Hot Years: 5 Picks

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Last year, the semiconductor industry outpaced the S&P 500’s astonishing returns, which made many believe that chipmakers do not possibly have any room to run this year. They however were largely mistaken. From high-end gaming, emergence of Internet-of-Things (IoT) to automation demand for chips, all are skyrocketing. Meanwhile, supply is low which spells a grand period for chip stocks.

Given the bullishness, investing in solid semiconductor stocks seems like a foolproof plan.

High Tech Industries Rely on Semiconductors

At the end of 2017, financial holding company Morgan Stanley MS said that semiconductor stocks have reached their peak and, thus, investors should have “increasingly negative prospects for the industry.” This resulted in a correction in the semiconductor industry, thereby, marring the prospects of chip makers entering 2018.

The semiconductor industry, however, fought all odds and continued to expand, climbing 20% on a year-over-year basis in the first four months of this year. And this was possible because of tech behemoths’ dependency on semiconductors, something, which will propel the industry to even greater heights.

And why not? Semiconductor chips are in demand for some of the fastest growing tech industries in the world like e-sports and crypto mining. E-sports, a multiplayer video game for professional gamers, needs thousands of semiconductor chips for production. These chips are an essential part of crypto mining as they provide the processing power needed for decoding blockchain algorithms.

Demand-Supply Disparity

But, it’s not just e-sports and crypto mining, emergence of cloud data-centers and artificial intelligence (AI) to name a few have also driven demand for chips. Meanwhile, increased chip complexity has resulted in lack of supply.

Higher demand along with low supply has pushed the prices of chips, giving chipmakers huge profit margins. This is the reason why iShares PHLX Semiconductor ETF and Market Vectors Semiconductor ETFs have steadily outpaced the broader market. While the ETFs are up more than 25% over the past year, the S&P 500 gained 13.5%.

Nvidia’s Stellar Performance Reflects High Demand

NVIDIA Corporation’s NVDA recent upbeat quarterly performance underlined the strong demand for semiconductors across the globe. Chipmakers’ first-quarter net income totaled $1.24 billion or $1.98 a share, way more than $507 million or 79 cents a year ago. Revenues too rose to $3.21 billion from $1.94 billion in the year-ago period. The results, by the way, topped Wall Street estimates.

Nvidia founder and chief executive, Jensen Huang said that “our data-center business achieved another record and gaming remained strong. At the heart of our opportunity is the incredible growth of computing demand of AI, just as traditional computing has slowed.”

5 Red-Hot Chips

With demand showing no signs of weakness amid relatively constrained supply, chip stocks should continue to stay hot. And one of the hottest chip stocks in the past 12 months has been Micron Technology, Inc. (MU - Free Report) .

Micron’s shares surged 78.6% in the time frame. Even though high-end smartphone demand is declining, it is compensated by the increase in demand in high growth areas like cloud data-centers and AI. Apple Inc. AAPL, in the meantime, might be facing a slack in its smartphone business but other products like smartwatches and tablets are making up for it. Hence, overall demand for Micron’s products remains robust. These factors should help Micron to keep climbing higher. The stock, which is part of the Semiconductor Memory industry, is expected to gain a whopping 121.6% this year.

To top it, investors have seen nine earnings estimate revisions higher, compared with none lower, at least when looking at the current-year time frame. And the Zacks Consensus Estimate for Micron’s earnings has trended almost 4% upward over the past 60 days. If this wasn’t enough, Micron flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some of the other chip stocks that have been red hot in the past year and should stay that way are Cabot Microelectronics Corporation CCMP, Diodes Incorporated DIOD, Ichor Holdings, Ltd. ICHR and Texas Instruments Incorporated TXN.

Cabot Microelectronics manufactures and sells polishing slurries, and pads used in the manufacture of advanced integrated circuit (IC) devices in the semiconductor industry. Currently, the company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings rose 4.2% in the last 60 days. The stock gained 44.9% in the said period. The stock’s projected growth rate for the current year is 37.9%, compared with the industry’s gain of 4.1%.

Diodes manufactures and supplies application-specific standard products in the discrete, logic, and analog and mixed semiconductor markets. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 2.6% in the last 60 days. Shares of the company have climbed 24% in the past year. The stock’s projected growth rate for the current year is 45.9%, compared with the industry’s gain of 4.1%.

Ichor Holdings – a Zacks Rank #2 company – manufactures fluid delivery subsystems and components for semiconductor capital equipment. The Zacks Consensus Estimate for its current-year earnings rose 7.9% in the last 60 days. The stock has jumped 28.5% over the past one-year period. The stock’s projected growth rate for the current year is 52.2%, compared with the industry’s gain of 4.1%.

Texas Instruments manufactures and sells semiconductors to electronics designers and manufacturers. Currently, the company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 9.9% in the last 60 days. The stock has surged 34% over the past year. Its projected growth rate for the current year is 26.9%, compared with the industry’s 18.4%.

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