With computing and cloud stocks that are capitalizing on the work-from-home economy rallying, an analyst at Morgan Stanley is of the view that it's time to rotate out of them — and into semionductor stocks that are levered to a rebound in consumer spending.
The Semiconductor Analyst
Analyst Joseph Moore made the following changes to the ratings of the stocks in his coverage universe:
Intel Corporation INTC shares were downgraded from Overweight to Equal-weight with a price target upped from $61 to $65.
NVIDIA Corporation NVDA was downgraded from Overweight to Equal-weight, with a price target raised from $363 to $380.
Qorvo Inc QRVO was upgraded from Equal-weight to Overweight with a price target hiked from $91 to $130.
Lam Research Corporation LRCX was upgraded from Equal-weight to Overweight with a price target increased from $253 to $334.
QUALCOMM, Inc. QCOM was upgraded from Equal-weight to Overweight and the price target was moved up from $83 to $102.
The Semiconductor Thesis
The recession is bottoming out and is likely to be followed by a V-shaped recovery, Moore said in a Tuesday note. (See his track record here.)
Against this backdrop, the analyst said it's worthwhile to shift his preference away from cloud and other compute stocks that he said have "idiosyncratic" momentum carrying them through the weakness.
Instead, Moore said he prefers names that are likely to see one or two quarters of fundamental weakness but are more directly levered to an economic recovery, such as smartphones, memory and equipment and eventually auto and industrial.
"It's a shift from growth to cyclical, but also a shift from idiosyncratic growth drivers (which suddenly comes at a high price) to stocks that are more of a direct play on a robust rebound in consumer spending," the analyst said.
Among its investment goals for the semiconductor sector, Morgan Stanley is maintaining at least market weightings on the sector and is taking profits in overvalued cloud names, he said.
The analyst said he recommends increasing exposure to more cyclical elements by buying smartphone chipmakers; pure cyclical exposure in semicap, with a focus on memory over foundry; and cyclical analog stocks that still have a tailwind of multiple expansion.
Chipmakers with exposure to autos should see a bottom, as that sector is experiencing significant weakness, Moore said.
The analyst also sees the new stimulus in Europe as being encouraging for semi companies with electric vehicle exposure.
Morgan Stanley remains Underweight on stocks such as Texas Instruments Incorporated TXN, which has already seen significant multiple expansion, and ON Semiconductor Corp ON, where Moore said margin performance is weak and competitive risks are rising.
Semiconductor Price Action
At the market close Tuesday:
- Intel shares were up 0.5% at $60.40.
- Nvidia was down 1.15% at $362.74.
- Qorvo gained 2.61% to $112.58.
- Lam Research shares rallied 5.34% to $305.48.
- Qualcomm was up 3.62% at $89.52.
Photo courtesy of Nvidia.
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