With Semiconductor Demand Uncertain, KeyBanc Presents Stock Ideas

The state of the semiconductor industry has been the subject of much debate, and most analysts are wary of the demand outlook for the sector in the near- and medium-term.

Against this backdrop, an analyst at KeyBanc Capital Markets revisited the prospects for the sector on the basis of his channel checks and checks with the Asian supply chain.

The Analyst

Analyst Weston Twigg upgraded Qorvo Inc QRVO from Sector Weight to Overweight with an $85 price target.

In KeyBanc's semiconductor coverage universe, the other Overweighted stocks are:

Applied Materials, Inc. AMAT: $56 price target 

Broadcom Inc AVGO: price target lifted to $335

Entegris Inc ENTG: $39 PT 

KLA-Tencor Corp KLAC: $143 PT 

Lam Research Corporation LRCX: $223 PT

Micron Technology, Inc. MU: $49 PT 

Monolithic Power Systems, Inc. MPWR: $150 PT 

MKS Instruments, Inc. MKSI: $112 PT 

Xilinx, Inc. XLNX: PT raised from $140 to $145

Teradyne, Inc. TER: $43 PT 

The Thesis

First-quarter demand remained weak and was below expectations, although supply chain partners suggested that order trends were stabilizing after the Chinese New Year, Twigg said in a Monday note.

With channel inventory elevated, Asian supply partners are pessimistic regarding a meaningful recovery over the next several quarters in cyclical semiconductors, the analyst said. 

Twigg sees softer than seasonal demand and limited visibility into any upturn or recovery, leading to inventory reduction at chip buyers but an inventory build with producers.

Some demand stabilization is likely in the second quarter, with the potential for a modest improvement in the second half, Twigg said. 

"With respect to tariff risk, many companies are actively shifting production to neutral countries, while new capacity investments are limited in the face of uncertainty," he said.

KeyBanc said 4G rollouts in China related to band refarming represent incremental upside, along with 5G expectations.

The firm also noted weak demand for mobile in China, excluding the demand for Huawei. That said, enhanced functionality of Samsung Electronics Co Ltd SSNLF's GS10 has led to better-than-expected offtake of the phone, Twigg said. 

See also: BMO's Semiconductor Pair Trade: Buy ON, Step To The Sidelines On Xilinx

Positive Stance On Qorvo Stems From Market Share Gains

Qorvo has succeeded in gaining market share in the next-gen iPhone in the mid-high band PAD, Twigg said. The company is likely to benefit from the 5G upgrade cycle, given the architectural shift to massive MMO and the company's improving positioning with its GaN IP and assets, he said. 

KeyBanc also sees favorable risk-reward in Qorvo stock given the significant amount of skepticism in the ability of the company to gain share.

KeyBanc Recommends Xilinx, Broadcom

The firm recommends buying Xilinx due to evidence of increasing demand associated with strengthening communications infrastructure deployments in both 5G and 4G. KeyBanc also recommends buying Broadcom on stabilizing iPhone demand.

Semi Capital Equipment Stocks Derisked

Despite expectations for a 15-percent decline for semiconductor capital equipment companies, Twigg said the stocks trade at low valuations and therefore appear relatively derisked.

The analyst recommends building positions into a likely demand recovery early next year.

Due to exposure to 7nm foundry ramp and EUV, the analyst said KLA-Tencor and ASML Holding NV ASML are well-positioned in the near-term.

The Price Action

Notwithstanding the lukewarm outlook for the sector, the iShares S&P NA Tec. Semi. Idx. Fd. SOXX has added about 24 percent year-to-date. 

Related Link: Intel Is The Semiconductor Sector's Only Candidate For Estimate Raises, Nomura Says In Upgrade