Mer­rill Lynch: Ap­ple slow­down should not ef­fect th­ese top chip stocks

Financial Mirror (Cyprus) - - FRONT PAGE -

The mar­ket has started the year off bad enough with­out toss­ing in con­cerns of a dras­tic pro­duc­tion slow­down at some sup­pli­ers of tech­nol­ogy gi­ant Ap­ple Inc. One of the stocks get­ting hit the hard­est is Ap­ple it­self, which is down an as­ton­ish­ing 28% from highs in April of last year. The melt­down in the stock and the over­all mar­ket sen­ti­ment has hit some top chip stocks hard, and now may be the time to be look­ing at the ca­su­al­ties.

A new Mer­rill Lynch re­search note makes the case that, based on meet­ing with top cor­po­rate ex­ec­u­tives at the huge Con­sumer Elec­tron­ics Show re­cently, the gloom and doom men­tal­ity run­ning ram­pant may be way over­done. In fact, for many of the top com­pa­nies, it’s re­ally more of “busi­ness as usual”.

Three top stocks re­main high on the charts at Mer­rill Lynch and are all rated Buy.

made big head­lines with a block­buster buy­out of chip gi­ant Broad­com, but it is down 10% far this year. Avago was orig­i­nally a part of Hewlet­tPackard and gets a huge chunk of its busi­ness from Ap­ple and Sam­sung. It’s a big provider in the cloud/hyper­scale data cen­tre and net­work­ing sec­tor.

The com­pany re­cently an­nounced

Avago

Tech­nolo­gies

Ltd.

it will demon­strate its lat­est op­ti­cal trans­ceiver tech­nolo­gies for next gen­er­a­tion data cen­tre and en­ter­prise stor­age ap­pli­ca­tions. As data cen­tre net­works tran­si­tion to 100G speeds to sup­port higher band­width de­mands, tech­ni­cal chal­lenges emerge across var­i­ous lev­els of the net­work from stor­age end­points to servers to top-of-rack and core switches.

The com­pany pro­duces ra­dio fre­quency front-end for LTE-en­abled Ap­ple prod­ucts. Wall Street es­ti­mates that the com­pany does 15% of its to­tal busi­ness with Ap­ple. Es­ti­mates are that Avago has be­tween a 13% and 17% rev­enue ex­po­sure to Ap­ple in the wire­less com­mu­ni­ca­tions seg­ment, which was guided up 10%+ quar­ter over quar­ter for the third quar­ter. The an­a­lysts note that cus­tomer di­ver­sity and con­tent for Sam­sung could be more than enough to off­set slower Ap­ple busi­ness.

Mer­rill Lynch sees a cycli­cal re­bound in in­dus­trial and com­mu­ni­ca­tions de­mand but does cau­tion that the in­te­gra­tion and fi­nan­cial risk of the Broad­com ac­qui­si­tion could weigh on the stock.

Avago in­vestors re­ceive a 1.37% div­i­dend. Mer­rill Lynch has a big $180 price tar­get on the stock. The Thom­son/First Call con­sen­sus tar­get is $171.33. Shares closed on Fri­day at $128.20.

NXP Semi­con­duc­tors N.V.

is a top play for in­vestors look­ing for a chip stock with In­ter­net of Things (IoT) ex­po­sure, though it is down a stun­ning 34% from highs printed in June of 2015. The NXP Semi­con­duc­tors merger with Freescale Semi­con­duc­tor was widely ap­plauded on Wall Street, and many an­a­lyst be­lieve the merger can trans­form the com­pany into a pow­er­house.

The Freescale merger made NXP the fourth largest semi­con­duc­tor com­pany in the in­dus­try, while the com­bined com­pany would be the num­ber one sup­plier in auto semi­con­duc­tors, num­ber one sup­plier in global mi­cro­con­trollers and a dom­i­nant sup­plier in mo­bile pay­ments.

NXP is get­ting its chips into high-growth ar­eas such as con­tact­less mo­bile pay­ments, the IoT, mo­bile-phone charg­ing, in­creased cel­lu­lar data con­sump­tion and LED light­ing. The two busi­ness seg­ments that cover th­ese prod­ucts grew 39% and 29% year over year, very im­pres­sive num­bers.

Some Wall Street an­a­lysts feel that if man­age­ment can suc­cess­fully con­vince in­vestors that its long-term growth tar­gets, which are 10% sales growth and 20% earn­ings-per-share growth, are still vi­able and in­tact, the huge sell-off could wind up look­ing like an out­stand­ing buy­ing op­por­tu­nity. Mer­rill Lynch notes that the com­pany sees lim­ited China im­pact.

Mer­rill Lynch has a $105 price tar­get, but the con­sen­sus is higher at $106.29. The stock closed Fri­day at $75.18.

is the non-con­sen­sus top pick at Mer­rill Lynch and one of the lead­ers when it comes to sup­ply­ing graph­ics pro­cess­ing tech­nol­ogy for the 3D graph­ics mar­ket, in­clud­ing desk­top graph­ics pro­ces­sors and gam­ing con­soles. It is also mov­ing into vis­ual com­put­ing chips for cars,

NVIDIA Corp.

mo­bile devices and su­per­com­put­ers. It also has a tech­nol­ogy part­ner­ship with elec­tric car maker Tesla.

NVIDIA has been able to use its abil­ity to lev­er­age past in­vest­ments, with a more con­trolled spend­ing struc­ture ahead on uni­fied, which en­ables strong cash flow that is al­low­ing a fo­cus on cap­i­tal re­turn, cur­rently es­ti­mated to be $1 bln.

The com­pany most re­cently posted earn­ings that were way ahead of es­ti­mates, and the first-quar­ter out­look im­plies earn­ings per share well ahead of cur­rent con­sen­sus. With gam­ing rev­enues up 44% year over year, an­a­lysts be­lieve there re­mains high over­all Wall Street skep­ti­cism around the com­pany, as most are un­aware of the pos­i­tive dy­nam­ics in the PC gam­ing and es­ports mar­kets.

Some Wall Street an­a­lysts feel that vir­tual re­al­ity could see 10 mil­lion in an­nual ship­ments in three to five years, and NVIDIA will be a huge player. In fact, it’s pos­si­ble that those ship­ments could rep­re­sent as much as $750 mil­lion per year for the com­pany and com­peti­tor AMD.

In­vestors re­ceive a 1.4% div­i­dend. The Mer­rill Lynch price ob­jec­tive is $35. The con­sen­sus tar­get is $31.58, and the stock closed Fri­day at $29.63.

While the Ap­ple fall­out is by no means in­con­se­quen­tial, com­bined with the re­cent mar­ket panic and sell­ing, it has knocked th­ese top com­pa­nies way down, and fast. Ag­gres­sive in­vestors look­ing to add al­pha for 2016 should con­sider po­si­tions.

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