Buying Opportunity in Pockets of Semiconductor Space

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Semiconductor stocks have been hit hard in the wake of the novel coronavirus (COVID-19) epidemic that has severely disrupted both chip production and demand in China and neighboring countries. Shares of the PHLX semiconductor sector index are down 19% after peaking in mid-February. We had previously viewed many semiconductor names in our coverage universe as overvalued, but the recent pullback has led to multiple names reaching or approaching 4-star territory. Namely, Intel INTC, Broadcom, Qualcomm, Xilinx, Applied Materials AMAT, and KLA KLAC are all undervalued. Of these names, our top pick is wide-moat Intel ($70 per share fair value). Wide-moat equipment suppliers such as KLA and Applied also appear attractive at current levels, with unchanged fair value estimates of $160 and $65 per share, respectively.

We continue to expect competitive headwinds from AMD to impact Intel over the next few quarters. At its analyst day on March 5, AMD noted 15% of its 2019 sales came from the data center and set a long-term sales growth target of 20%, with data center contributing more than 30% of total revenue. We think this implies a $5 billion target for AMD’s data center sales (CPUs and GPUs) by 2024, which is considerably above our estimate of $3.5 billion (CPUs only). We believe Intel will ably navigate the near-term challenges while investing in critical process and design technologies (7-nanometer, Artificial Intelligence, and automotive).

Despite the uncertainty regarding COVID-19, Applied CEO Gary Dickerson noted he doesn’t anticipate a material impact to the firm’s 2020 results when the firm reported on Feb. 12. While revenue guidance for Applied’s next quarter would have been about $300 million higher at the midpoint absent the near-term risks, management was confident this shortfall was not permanent demand destruction. KLA’s management expects revenue in the March quarter to be $1.325 billion-$1.525 billion, with the coronavirus contributing to a wider-than-typical range.

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