Micron Technology, Inc. MU has been temporarily banned from selling chips in China. This dealt a severe blow to the stock price of the chipmaker, with other chip stocks following suit.
But, the red-hot chip stock is, undoubtedly, ready to make a comeback. Micron, the world’s leading provider of innovative memory solutions, has had a mind-boggling run so far this year. The stock has gained 25%, compared with a 3.6% rise of the PHLX Semiconductor Index and 1.5% of the S&P 500.
The chip industry, in itself, offers upside even after stellar years. From high-end gaming, emergence of Internet-of-Things (IoT) to automation demand for chips, all are skyrocketing. Meanwhile, supply is low which spells a grand period for chip stocks. Hence, it is the ideal time to capitalize on the current slump by betting on chip stocks that are poised to grow in the near term.
Micron Stock Dives as China Blocks Sales
China’s Fuzhou Intermediate People’s Court has issued an authoritative warning against Micron’s Chinese holdings blocking sales of PRC 26 DRAM and NAND-linked items. This included solid-state hard drives and memory sticks. The Boise, ID-based company’s subsidiaries like the Micron Semiconductor (Xi’an) Co were earlier charged for patent infringement by Fujian Jinhua Integrated Circuit Co. (Jinhua) and Micron Semiconductor (Shanghai) Co. Ltd. was slapped with the same charges.
Micron is already embroiled in a trade war between the United States and China, when the Chinese regulators launched an investigation into memory-chip pricing. Nonetheless, shares of the chipmaker tanked 5.5% to close at $51.48 on Jul 3 after hitting an intra-day low of $50.10. Markets remained closed on Jul 4 as the nation observed Independence Day.
Shares of other semiconductor stocks did suffer due to the tussle between the Asian nation and Micron. China is fighting for advanced chip technology and knowhow, while the Trump administration intends to block additional technology exports to Beijing. Chipmakers, including Intel Corp. INTC, Nvidia Corp. NVDA and Qualcomm Inc. QCOM, saw their shares decline 1.5%, 2.2% and 1.5% on Jul 3, respectively. The PHLX Semiconductor Index went down 1.8%, after the Chinese court ruling came out.
Micron Still Has Upside Potential, But Why?
But, it isn’t doomsday for Micron or the semiconductor industry. Micron does generate half of its revenues from China, per Fact Set. However, semiconductors are components of products that are sold elsewhere added Morgan Stanley MS. Thus, the adverse effect of high revenue exposure to China “is not as meaningful” as it can be for other industries.
Micron’s chief financial officer Dave Zinsner forecasts fiscal fourth-quarter adjusted earnings of $3.23 to $3.37 a share on revenues of $8 billion to $8.4 billion, better than analysts’ projection of $3.16 on sales of $8.02 billion. In fact, the chipmaker’s fiscal third-quarter 2018 profits more than doubled from the year-ago levels, while sales surged 40%. The chipmakers net income of $3.82 billion, or $3.10 per share, on sales of $7.8 billion, was up from $5.57 billion a year ago.
And luckily for investors, top analysts are optimistic about further growth ahead. Top benchmark analyst Mike Burton said that “MU has progressed from a ‘cash burn’ to a ‘cash return’ story in only two years, and we expect the stock to remain a cyclical growth name, generating increasing profits and cash flow on each respective high and low of the memory cycle.” He has raised his price target to $80 per share (55% upside potential from the current price).
Micron bear UBS analyst Timothy Arcuri has upgraded the stock from “Sell” to “Hold” and raised his price target from $42 to $60 (16.5% upside potential from the current price).
Semiconductor Industry in the Pink
But, why just buy Micron? Semiconductor chips are much in demand, largely due to gaming, emergence of IoT and automation.
E-sports, a multiplayer video game for professional gamers, needs thousands of semiconductor chips for production, while chips are an essential part of crypto mining as these provide the processing power needed for decoding blockchain algorithms.
5 Solid Chipmakers for Your Portfolio
Banking on the strengths, chipmakers are positioned to make a comeback in the near term. Since the long term bodes well for stocks after the initial dip, it will be wise to invest in such stocks. Furthermore, by purchasing stocks right after a dip, investors are essentially buying shares at a discount. We have, thus, short-listed five stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Micron Technology provides semiconductor systems. The stock currently has a Zacks Rank 1. In the last 60 days, nine earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings climbed 6.6% in the same period.
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The company’s expected earnings growth rate for the current quarter is 63.4% compared with the Semiconductor Memory industry’s estimated rally of 55.4%. Micron’s projected earnings growth for the current year is more than 100%.
NVIDIA Corporation operates as a visual computing company. The stock currently has a Zacks Rank 1. In the last 60 days, 12 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings jumped 12.5% in the same period.
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The company’s expected earnings growth rate for the current quarter is 81.2% compared with the Semiconductor – General industry’s projected rally of 53.8%. NVIDIA’s projected earnings growth for the current year is 61.2%.
Intel Corporation designs, manufactures, and sells computer, networking, data storage, and communication platforms. The stock currently has a Zacks Rank 2. In the last 60 days, 12 earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings climbed 4.2% in the same period.
The company, which is part of the Semiconductor – General industry, is expected to give a solid return of 37.5% and 15.6% in the current quarter and year, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Microchip Technology Incorporated MCHP manufactures, and sells semiconductor products for various embedded control applications. The stock currently has a Zacks Rank 1. In the last 60 days, nine earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings rose 11.6% in the same period.
Microchip Technology’s shares dropped 1.5% on Jul 3. But, the company’s expected earnings growth rate for the current quarter is 13.7%, while its projected growth for the current year is 20%, higher than the Semiconductor – Analog and Mixed industry’s rally of 5.9%.
Diodes Incorporated DIOD designs, manufactures, and supplies application-specific standard products in the discrete, logic, and analog and mixed semiconductor markets. The stock currently has a Zacks Rank 1. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings climbed 5.1% in the same period.
Diodes’ shares slipped 1.4% on Jul 3. But, the company’s expected earnings growth rate for the current quarter is a superb 50%, while its projected growth for the current year is 49.6%, higher than the Electronics – Semiconductors industry’s rally of 11.3%.
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