Analyst Toshiya Hari revealed Monday in a new research note eight names in the chip space that are top picks for the investment bank: Advanced Micro Devices, Marvell, Analog Devices, Teradyne, Impinj, Micron, ON Semiconductor and Qorvo.
Hari warns, however, that stock selection in chips will take on greater importance this year after a strong run-up across the sector in 2021.
“Despite the cyclical concerns, we believe 2022 will offer ample single stock opportunities given the dispersion in price performance we have witnessed over the past several years. Similar to our approach heading into 2021, we recommend investors own companies/stocks with idiosyncratic drivers that can augment growth in a sustained upturn or at least partially offset broader industry weakness should a downturn kick in,” said Hari.
Hari’s call on these stocks reflect several factors.
First, there are sector specific catalysts such as expanding budgets by companies for data centers, ongoing 5G smartphone adoption and infrastructure rollout, and a rebound in auto and industrial production.
Explained Hari, “An acceleration in a wide range of secular trends (e.g. transition to the cloud, proliferation of AI/ML, EV/ADAS, and FA, among others) that are enabled by semiconductors has driven or is driving a fundamental shift in the industry’s trend-line. All in, while we enter 2022 with a somewhat guarded posture, we expect fundamentals to remain strong through 1H22, and for any signs of cyclical moderation/weakness to show up in the latter part of the year, at the earliest.”
As for other important catalysts for these eight chip stocks, Hari believes sticky inflation is good and relative valuation remains attractive.
“Following its third consecutive year of outperformance vs. the S&P 500, the SOX [Index] is trading at a ~21% premium to the SPX on NTM P/E [multiple] and near its highs since 2010. The valuation picture, however, is less acute for the median stock in our coverage universe. In fact, the median stock in our coverage is currently trading at a ~7% discount to the SPX. While we are clearly cognizant of the cycle and the tendency for multiples to compress as we approach the peak of a cycle, we believe the sector deserves to trade at a premium to the broader market for its above-average 1) revenue growth profile, 2) margin profile, 3) FCF generation, 4) shareholder return profile, and 5) barriers to entry,” Hari added.