Cyclical Fears For Semis Are Rising, Says Deutsche Bank

Semiconductor stocks led by NVIDIA Corporation NVDA have exploded higher as a combination of chip demand and rising prices created the perfect opportunity for growth. However, after another huge year for demand in 2017, investors must decide whether the semiconductor boom is cyclical or secular.

In a new report, Deutsche Bank analyst Ross Seymore said semiconductor revenue growth is likely to decline significantly in 2018, and investors should be prepared. Seymore is expecting sector-wide revenue growth for 2018 to be just 5 percent overall, well short of the 22-percent growth in the space in 2017. 

Memory was the big winner in 2017, growing revenue by 61 percent last year, according to Deutsche Bank. Most of the growth came from a 57-percent uptick in average sales price compared to just a 3-percent increase in unit volume. Ex-memory growth was also a healthy 10 percent in 2017, well above its 10-year average of just 3 percent.

Given the relative outperformance of semiconductor stocks in recent years, Seymore said the risk of a pullback this year is fairly high — and stock picking is extremely important at the moment. (See the analyst's track record here.)

“In this environment, we see the greatest potential for maximized return in names that are favorably valued relative to peers and the industry as a whole and names with revenue-independent levers to gross and operating margins,” Seymore said.

Deutsche Bank has named Intel Corporation INTC as its top large-cap stock pick; Maxim Integrated Products Inc. MXIM and Microsemi Corporation MSCC as its top mid-cap stock picks; and Inphi Corporation IPHI and MaxLinear, Inc. MXL as its top small-cap stock picks.

Related Links:

How Long Will The Cryptocurrency GPU Boom Last?

AMD Has More To Lose Than Nvidia Should Bitcoin Mining Hardware Sales Decline