Tech stocks are poised to outperform yet again as the industry sees accelerating growth, according to an analyst at BofA Securities.
Factors Favoring The Outperformance: The semiconductor industry will see an accelerating compounded annual growth rate of 8% from the calendar year 2020 through 2022, compared to the 2% growth of the past three years, analyst Vivek Arya said in a note.
Looking ahead, global GDP growth is set to accelerate to 5.4% in 2021, marking the highest growth rate since 1973, BofA estimates. Inventory levels are lean, Arya said.
The industry is also likely to benefit from enhanced investments in 5G, as phone units increase to double that of the previous year, the analyst said. Arya also sees secular tailwinds from cloud, AI gaming, IoT and digitization of the global economy.
"While COVID-19 recovery could be uneven and rising rates impact trading multiples, we expect greater investor interest in semis as a source of high-quality alpha generation," Arya wrote in the note.
Top Investment Themes: Infrastructure investments, 5G, automobiles and cloud are the four major investments in 2021, BofA said.
The firm named Applied Materials, Inc. AMAT as its top large-cap pick and II-VI, Inc. IIVI as the top SMID-cap pick.
Chip Infrastructure Players: Among these themes, semiconductor capital equipment is the most favored, BofA said. Premised on memory price recovery, rising capital intensity, 5G, reshoring and cloud, the firm raised its 2021 fab equipment growth forecast from 8% previously to 10%.
The top large-cap designation for Applied Materials is premised on compelling valuation, share gains, diverse exposure and Kokusai share gains, the firm said. The firm also raised the price target from $105 to a street-high $115.
The firm increased the price target for Lam Research Corp. LRCX from $555 to $590 and that for KLA Corp. KLAC from $300 to $315.
BofA upgraded Teradyne, Inc. TER shares from Neutral to Buy and increased the price target from $125 to $150.
Teradyne, a testing leader in a duopoly market, is uniquely positioned to capture Apple Inc.'s AAPL rising internal semi design, and benefit from recovery in industrial/autos/robotics demand, BofA added.
Auto/EV, Industrial Sector Levered Chip Stocks:
NXP Semiconductors NV NXPI is BofA's top pick to benefit from the theme, given that it is most levered to autos, Arya said. The firm will also benefit from IoT recovery, a compelling valuation, new iPhone content and potential S&P 500 inclusion, he added. Arya raised the price target from $190 to $205.
Arya also said he likes Microchip Technology Inc. MCHP, Analog Devices, Inc. ADI and Texas Instruments Incorporated TXN.
II-VI, which is BofA's mid-cap pick, has underappreciated assets in Gallium Nitride and Silicon Carbide for a wide range of auto/EV and industrial markets, Arya said. The valuation of the stock is also attractive, he added.
BofA double upgraded MACOM Technology Solutions Holdings Inc. MTSI from Sell to Buy, premised on its innovative compound semiconductor vendor with attractive restructuring potential, and increased the price target to $70.
ON Semiconductor Corp.'s ON stock price appreciation reflects most of the turnaround prospects, BofA said.
5G Plays: With 5G infrastructure investment gathering momentum, Marvell Technology Group Ltd. MRVL is BofA's favored investment, Arya said.
In 5G smartphones, BofA likes Qorvo Inc. QRVO and Cirrus Logic, Inc. CRUS. On the other hand, the firm downgraded Skyworks Solutions Inc. SWKS shares from Buy to Neutral, since its 56% Apple exposure leaves it vulnerable to share shifts to Broadcom Inc. AVGO and QUALCOMM, Inc. QCOM.
Cloud Growth Continues: Arya said he continues to like NVIDIA Corporation NVDA and Advanced Micro Devices, Inc. AMD. However, enhanced market rotation volatility is expected, he added.
The analyst maintained an Underperform rating on Intel Corporation INTC.
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