Semiconductor stocks have seen nearly a 7-percent retreat since late-September, although they are up solidly for the year. Oppenheimer offered its take on how the sector is likely to fare in 2018.
The iShares S&P NA Tec. Semi. Idx. Fd.(ETF) SOXX is up about 37 percent year-to-date, on top of a gain of similar magnitude in 2016. The recent year's gains were achieved on the back of upside growth and accretive acquisition, said Oppenheimer analyst Rick Schaffer. He attributes the recent pullback to late-year profit taking and general fear of an aging upcycle.
Benefiting From Rational Supply Chain
Based on late-September Asia checks and recent third quarter earnings reports, Schaffer said inventory levels were generally in line, demand trends remained stable and there were few signs of widespread constraint/double-ordering.
"We believe the industry is benefiting from a more rational supply chain driven by management teams' modest growth expectations, consolidation and improved supply chain management characteristic of a consolidating industry."
Comps Becoming Difficult
Total semiconductor revenues, excluding memory, were up 9 percent year-to-date, with growth peaking at 15 percent in May, according to Oppenheimer. The firm expects comparisons to get tougher, as the annual rate of non-memory semiconductor growth has been averaging around 8 percent since July 2016. Analog revenues, up 12 percent year-to-date, have been a bright spot, the firm said.
Analyzing the Verticals
Oppenheimer termed the auto, industrial and datacenter end markets as standout verticals. While China smartphone and communication infrastructure markets softened in the second half of 2017, the PC market fared better than feared, Schaffer said. The PC market looks poised to show flattish performance in 2018, better than the 5-percent-plus decline that was initially forecast.
"Long-term, auto and industrial remain two of our favorite multiyear, content-driven growth themes," Schaffer said.
Content Stories Preferred
Tight semiconductor component supplies have pushed Apple Inc. AAPL‘s iPhone X production to December or later, according to Oppenheimer.
"Within the Apple supply chain, we continue to prefer content stories to insulate from any potential demand softness (and leverage any unit upside) vs. elevated expectations, while taking an agnostic view of end unit demand."
The firm highlighted Broadcom Ltd AVGO and Skyworks Solutions Inc SWKS as two notable content stories.
M&A Is Alive & Kicking
The pace of M&A, though slowing from the record pace of $135 billion in 2016, remained alive and well in 2017, valued at $48 billion, Oppenheimer said, with the slowdown attributed to fewer mega-cap targets being available.
If a potential Broadcom/QUALCOMM, Inc. QCOM combination materializes, deal value could exceed the record level of 2016.
In 2018, the firm sees the bulk of M&A opportunities in the sub-$10 billion range, given the paucity of mega-cap targets and the acquisitive focus on bolstering exposure to sticky high-margin verticals such as auto, industrial, networking and datacenter.
Oppenheimer's top growth picks are:
- Skyworks Solutions
- Semtech Corporation SMTC
- Monolithic Power Systems, Inc. MPWR
The firm's preferences from the margin expansion and self-help leverage perspective are:
- Analog Devices, Inc. ADI
- Texas Instruments Incorporated TXN
- Marvell Technology Group Ltd. MRVL
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