Top Analyst Explains Why You Should “Buy” These 3 Chip Stocks
Booms and busts are familiar to every economist – they form the underlying patterns of long-term performance, for entire economies and for individual sectors. A recent report on the semiconductor chip industry helps show the pattern — and sheds light on where and how investors can now position themselves for maximum advantage.
First, based on global chip sales data, the report places the start of the current cycle in early 2020 at the beginning of the pandemic crisis. While this period was a hard blow to economies in general, it also marked the start of a boom in chip sales. Demand increased as office workers moved to remote connections and consumers upgraded home computing systems to handle the stress of increasing work from home, online schools and e-commerce shopping. A surge in smartphone and tablet purchases also helped boost demand for chips. This momentum continued into the first half of 2022.
We are now in the bust phase and have been for at least half a year. Sales hit record highs in the first half of last year, but plummeted in the second half. The question now is, have we bottomed this cycle or are we nearing bottom?
Mizuho Securities 5-Star Analyst Vijay Rakesh says we are nearing a bottom and he predicts a turn for the better in the near future.
“We are seeing improving structural trends driving an accelerated path to balancing supply and demand for storage,” Rakesh noted. q and memory prices down 10% year-to-date; However, we are close to a cyclical bottom. 1Q23 could see inventories peak and earnings bottom, with fundamentals to recover in 2H23E/2024E.”
To prepare for the upcoming upswing, Rakesh has upgraded three chip stocks from neutral to buy. Using the TipRanks database, we wanted to see if other Wall Street analysts agreed with Rakesh’s demands. Here’s what we found out.
Micron Technology, Inc. (mu)
The first chip giant on our radar is Micron Technology, a $65 billion player in the memory chip segment. Micron is known for its data storage products, including DRAM, flash memory, and semiconductor chip lines for USB drives. The company’s 1-Beta DRAM chip is currently the most advanced on the market, and the company recently announced upgrades to its data server memory portfolio line.
While Micron has been actively working to keep its chip lines state-of-the-art, the company has seen revenue decline in recent months. For the most recently reported quarter, the first quarter of fiscal 2023 – the quarter ended December 1, 2022 – Micron reported revenue of $4.09 billion. This was a sharp decrease from the $6.64 billion reported in 4Q22 and from the $7.69 billion reported in 1Q22. The company’s earnings, which were positive despite the decline in sales, turned negative 4 cents per share in 1Q23.
Unsurprisingly, the company’s share price has also fallen over the past year. Over the past 12 months, MU stock is down 33%, more than double the 15% drop a year earlier NASDAQ In the same period.
However, after consulting Mizuho’s Rakesh, we find that the analyst is bullish on the long-term. As previously mentioned, he has upgraded his stance on MU from Neutral to Buy, and Rakesh supports this, writing, “While we may continue to see some weakness in PC/Phone/Datacenter inventory digestion in the near term, we believe that investment cuts deliver multi-year low and 2H recovery along with improving investor sentiment position MU as we see FebQ/MaiQ low.”
Along with the buy rating, Rakesh also gives MU stock a price target of $72, which means ~20% upside potential for the coming year. (To see Rakesh’s track record, Click here)
Leading technology companies like Micron will always draw the attention of Wall Street, and this company has 23 recent analyst ratings on record. This includes 16 buy, 5 hold and 2 sell for a consensus rating of Moderate Buy. (See Micron Stock Forecast)
Western Digital (WDC)
Next is Western Digital, a major player in the chip industry. Based in San Jose, California, Western is another computer storage specialist — but its focus is on hard drives and other primary data storage, as well as SSDs and flash drives. Western has built a solid position in the data center and cloud storage niches, and its product lines include well-known brand names such as WD and SanDisk.
Western Digital is showing the same revenue and earnings pattern we saw at Micron above: a decline in revenue beginning in the second half of calendar 2022, accompanied by a decline in bottom line that translates into negative earnings. In its most recently reported quarter, Q2 of fiscal 2023 (the quarter corresponding to calendar 4Q22), Western reported total revenue of $3.11 billion. While that was at the high end of previously released guidance, it was still down nearly 17% sequentially and down 35% year over year.
Bottom line, Western reported a 42 cents-per-share earnings loss in the fiscal second quarter on non-GAAP measures. Under GAAP, quarterly EPS loss was $1.40. These numbers were down 8 cents on a GAAP basis and 20 cents on a non-GAAP basis from earnings in the prior quarter.
Despite the decline in profit/revenue, Western Digital still holds a strong position in its niche – and aims to improve its position. The company recently held talks with Japanese chipmaker Kioxia about a potential merger. While this remains in the rumor stage (no company has confirmed anything), such a move would create a combined entity with control of a third of the NAND flash chip market.
In the eyes of Mizuho’s Rakesh, this supports the recently upgraded Buy rating on WDC shares. Rakesh writes, “We believe WDC is positioned for an upside move in HDD [hard disk drive]and undervalued given a possible NAND rally in 2H23/24E and a possible strategic NAND spinalization with Elliot activism and possible merger talks with Kioxia… While near term we see some challenges in 1H23E with inventory corrections and weaker demand, we see improvement in the HDD /NAND market as suppliers focus on capital expenditure cuts and supply growth to help normalize inventory levels and prepare for better recovery in 2H23E/2024E.”
Based on all of the above factors, Rakesh gives WDC stock a price target of $50 to back up its Buy rating. This figure implies ~16% upside from current levels.
A total of 14 analysts have polled WDC recently and their ratings include 7 buy, 6 hold and 1 sell for a consensus rating of Moderate Buy. (See WDC Stock Forecast)
Seagate Technology (STX)
The last chip stock we look at is Seagate Technology, a longtime leader in hard disk drive (HDD) technology. Seagate developed the first 5.25-inch hard drives back in the 1980s and has pursued a successful growth path through acquisitions over the years. Today, Seagate is a $14 billion player with a product line in three areas: cloud & data center; Specialized drives; and Personal Storage.
Following the same pattern as Micron and Western Digital, Seagate has seen its revenue and earnings decline in recent months. The latest quarterly report was for fiscal year 2Q23 (the quarter ended December 30) and reported revenue of $1.89 billion. That was down 7% sequentially — and 39% year over year. Earnings fell to just 16 cents a share by non-GAAP measures; GAAP EPS posted a loss of 16 cents per share. Looking ahead, however, analysts are forecasting non-GAAP EPS to increase to 26 cents in the fiscal third quarter.
With that in mind, Mizuho’s Rakesh has one thing to say: Don’t throw in the towel just yet. The analyst believes this company has a good chance of emerging from the doldrums sooner rather than later.
“STX has delivered a significant ~25% qoq inventory reduction with better positioned 2H demand and a margin enhancing HAMR roadmap to 2024E for bulk capacity drives over 30TB…We are seeing HDD inventories normalizing after Q1 23E with potential for yield growth earlier than if inventory at key corporate customers is flushed out, setting STX up for a strong 2HC23E,” said Rakesh.
This is another chip stock that Rakesh has upgraded to a buy, and its price target here, $82, suggests potential for a 15% upside move later this year.
Overall, this stock shows an almost even split among The Street analysts; Of the 22 current ratings, there are 11 buy, 10 hold, and a single sell for a moderate buy consensus rating. (See Seagate stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important that you do your own analysis before making any investment.
https://finance.yahoo.com/news/cyclical-bottom-approaching-top-analyst-235230209.html Top Analyst Explains Why You Should “Buy” These 3 Chip Stocks