Wall Street has defied most analysts’ expectations amid the coronavirus pandemic, with the S&P 500 rallying 40% from the bottom hit on Mar 23. In fact, the broader index completed its best 50-day trading stretch on Jun 3, according to analysts at LPL Financial Research.
Importantly, chip stocks have fared even better, with the iShares PHLX Semiconductor ETF returning 44% from Mar 23 through Jun 3. So far this year, the iShares PHLX Semiconductor ETF is up 5% against the S&P 500’s decline of 2.5%.
So, what led to the outperformance? In order to curb the spread of coronavirus, stay-at-home orders were imposed by the government. Such lockdown measures drove strong demand for home office equipment, including desktop, laptop and tablet computers as well as home network gear, all of which need DRAM and NAND memory chips.
What’s more, the outperformance is widely expected to continue. This is because social-distancing measures are expected to continue as the economy reopens and majority of people are now getting accustomed to remotely working or learning.
Thus, most of the companies need to move a bulk portion of their workload to the cloud. To top it, consumers are now comfortable shopping online. Thus, any consumer-oriented business needs to have a digital presence built on the cloud in order to survive. And let’s not forget, cloud computing depends heavily on DRAM and NAND memory chips.
Investors also remain optimistic on the prospects of 5G wireless connectivity in the near future which in turn will increase the demand for chips. Memory-chip giant Micron Technology’s (MU - Free Report
) CEO Sanjay Mehrotra recently said that “5G will be a significant growth driver for multiple years in terms of increased unit sales as well as increased content for both DRAM and NAND.” He added that “we are at the sweet spot of the growth cycle in data center, and data center is a long-term growth driver for the industry.”
Further, from high-end gaming, emergence of IoT to automation, demand for chips will continue to rise. Needless to say, e-sport, a multiplayer video game for professional gamers, needs thousands of semiconductor chips for production, while chips are an essential part of crypto mining as these provide the processing power needed for decoding blockchain algorithms.
Bank of America, in the meantime, pointed out that the semiconductor industry’s secular and structural growth drivers will continue to support chip stocks despite escalating tensions between Washington and Beijing.
Per CNBC, renowned analyst Vivek Arya said that in the long run “semis will play a critical role in the new digital economy which is built on the processing, storing and networking abilities enabled by this very profitable, consolidated and disciplined sector.”
3 Red-Hot Chip Stocks
Thanks to the aforesaid bullish trends, chip heavyweights will surely garner most of the attention from investors. But there are some stocks whose shares have seen superb growth for quite some time. Here are a few of them that are poised to gain further in the near term.
Chipmaker NVIDIA Corporation (NVDA - Free Report
) is a global leader in the market for graphics processing units (GPUs), which are primarily used for running graphically-intensive video games. But of late, GPUs are also being used in an array of applications like cryptocurrency mining, AI and professional design.
This has certainly helped NVIDIA progress by leaps and bounds, with its shares outperforming the broader S&P 500 over the past year, increasing more than 130%.
The chipmaker has escaped the onslaught of the coronavirus outbreak, thanks to strong demand for AIs in cloud data centers and rising engagement on video games owing to widespread stay-at-home orders.
NVIDIA recently launched RTX Super gaming laptops and is expected to have fortified its leadership in the high end of the market. At the same time, NVIDIA's GeForce graphics cards are now being used by more than 200 million people.
NVIDIA currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has moved up 4.4% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 57.3% and 36.4%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Even though high-end smartphone demand is declining amid the pandemic, it is compensated by the increase in demand in high-growth areas like cloud data centers and AI, something that bodes well for Micron.
Micron is also benefiting from solid memory-chip demand from PC manufacturers and data-center operators as an increasing number of workers and students are working and learning from home amid the pandemic.
Apple Inc. (AAPL - Free Report
) , 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 keep climbing higher. At the same time, Micron is banking on revival in DRAM demand and increasing mix of high-value solutions in its portfolio. Thus, the company’s expected earnings growth rate for the next quarter and year is 32.1% and 61.3%, respectively.
Micron currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 12.8% over the past 60 days.
KLA-Tencor Corporation (KLAC - Free Report
) designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries.
It enjoys a strong competitive position in several chip equipment areas, including PCB (printed circuit board) and display. At the same time, KLA-Tencor has prominent exposure in some of the happening tech trends, such as 5G smartphones, 5G infrastructure equipment and autonomous driving sensors.
KLA-Tencor currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its current-year earnings has moved 0.6% north over the past 30 days. The company’s expected earnings growth rate for the current year is 16.6%. For the next five-year period, the company’s projected earnings growth rate is 12%.
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