By Tae Kim, Barron's
Updated Dec. 6, 2022 9:07 am ET
Advanced Micro Devices and four other chip stocks are considered buying opportunities by KeyBanc Capital Markets after the semiconductor sector’s big drop in share prices this year.
The iShares Semiconductor (ticker: SOXX) exchange-traded fund, which tracks the performance of the ICE Semiconductor Index, is down 30% this year. On Monday, the ETF fell 1.3%; the S&P 500 SPX –1.44% and the Dow Jones Industrial Average DJIA –1.03% were down 1.8% and 1.4%, respectively.
There are “clear signs that we’re entering an inventory correction cycle,” analyst John Vinh wrote on Sunday. “We see favorable risk/reward as we expect a ‘soft landing’ and believe the correction is largely priced in.”
Vinh recommends Analog Devices (ticker: ADI ), Advanced Micro Devices AMD –4.55% (AMD ), Nvidia NVDA –3.75% (NVDA), ON Semiconductor (ON), and Qualcomm QCOM –2.85% (QCOM). He has an Overweight rating for all five companies.
The analyst has a $220 stock price target for Analog Devices and an $85 target for AMD. For Nvidia, On, and Qualcomm, his targets are $230, $80, and $150, respectively.
On Monday, the stocks all traded lower: Analog Devices, 0.5% to $167.84; Advanced Micro Devices, 1.8% to $73.62; Nvidia, 1.6% to $166.10, On, 2% to $71.57; and Qualcomm, 1.9% to $123.30.
Vinh noted the forward price-to-earnings multiple for the chip sector has dropped 55% from the highs last December to October, which is more than the average 42% decline during past downturns.
The analyst is also optimistic the chip sector will be more resilient this time. He noted how the industry is more consolidated, which should lower the risk of excess capacity driving down chip prices.
In addition, there are several secular growth trends—including 5G, the move toward electric vehicles, cloud computing, and artificial intelligence—that should help soften the magnitude of the downturn.
Write to Tae Kim at firstname.lastname@example.org