Semiconductor Stocks: Year In Review; Where to Place Your Chips in 2018
With high-flying chip names such as @Micron (MU) and @Nvidia (NVDA) leading the way, #semiconductor stocks were one of 2017’s best-performing groups. Despite ending the year on a rough note, where the Philadelphia Semiconductor Index (SOX) declined almost 7% in late November, the SOX still crushed the broader market, posting 2017 returns of almost 40%, besting the 25% rise in the Dow Jones Industrial Average and a better-than 19% return in the S&P 500 Index. But as Lay’s has told us, when it comes to chips, you can’t eat just one. In that vein, unlike previous years, it was just the sexy growth chip names that dominated 2017. Even traditional powers like Intel (INTC), which rose 30%, ranking as one of the better-performing Dow components, participated in the rally. Thanks to its $15.3 billion acquisition of Israeli self-driving technology company Mobileye, Intel wrote its own narrative as a force to be reckoned with in the autonomous car market, which has become the new battleground for high-tech companies looking new revenue streams. Where Intel thrived Advanced Micro Devices (AMD), which was an early chip favorite in 2017, ended the year on a sour note. This is even though the company’s earnings during 2017 were consistently above expectations. In Q3 the company crushed estimates on both the top and bottom lines. Yet, the stock took a pounding, falling — at one point — more than 15%. Investors were fearful about the company’s lower Q4 guidance, which overlooked that the fourth quarter, with its implied sequential revenue decline, was seasonally weak and has little to do with business fundamentals. Nevertheless, in this fickle market where tons of other growth options exist, investors opted to go elsewhere. And it would seem Micron (up 85% in 2017) — a stock I told you to buy on March 23 at around $26 per share — and Nvidia (up almost 80%) were the beneficiaries. The former, which I proudly own, is operating on its stated objectives and better-diversifying the business, which — in my opinion — effectively removes the threat of what has been a highly cyclical industry for DRAM and NAND memory chip pricing. For Nvidia, few expected it would follow a colossal 2016 performance, during which it posted returns of 235%, with 2017 returns of almost 80%. But thanks to successes in high-growth markets like artificial intelligence, autonomous vehicles, where its chips are at the center of autonomous driving technology, the company posted breathtaking top- and bottom line growth results throughout 2017, which has now crushed Wall Street’s estimates the past two years. Elsewhere Broadcom (AVGO) — though it didn’t get nearly the attention as Micron and Nvidia — was a clear winner. With better than 45% returns, the wireless giant, which has chip placement in both Apple (AAPL) and Samsung (SSNLF) products, gives it an advantage over competitors. And its $130 billion offer for Qualcomm (QCOM), which if completed, would be the biggest-ever tie-up in the tech sector, suggest Broadcom has no plans to rest in search of value-creating opportunities. Which companies will be this year’s Micron, Nvidia or Broadcom? Though it’s early, I expect AMD to have a bounce-back year. Other names to keep an eye on include Analog Devices (ADI), Cavium (CAVM), Texas Instruments (TXN), and Xilinx (XLNX). Granted, as evidenced by their strong performances in 2017, lead by Texas Instrument’s 44% gain, these four are not in the discount bins. But not only are they solid in terms of execution (not one missed analysts top or bottom-line estimates in 2017), they each have extensive product portfolios, containing assets that serve multiple applications within primary end markets such as enterprise storage, industrials, wired and wireless businesses, which are all growing at double-digit rates.