Although some may have argued last year that “this time is different,” semiconductor stocks reminded everyone that they remain cyclical this year. The SPDR S&P Semiconductor ETF (XSD) peaked at $251 on January 3rd. Since then, it has tumbled 32%, underperforming the S&P 500 and the NASDAQ. The drawdown in many individual semiconductor stocks has been worse.
However, the pain may be closer to the end than the beginning in these stocks. Last week, Congress overwhelmingly voted in support of advancing the CHIPS Act, a bill that would inject $52 billion, plus additional tax incentives, into the industry.
Another vote is expected soon, and if the bill passes, semiconductor manufacturers could start investing in new Domestic capacity, including fabs, as soon as next year. If so, we could see a ‘domino effect’ of good news as investments result in more orders for semiconductor manufacturing equipment, and eventually, semiconductor supply bottlenecks easing.
The progress on the CHIPs act coincides with returning seasonal strength for the industry. Historically, the SEMI book-to-bill ratio, a measure of orders to deliveries, peaks in the second quarter, troughs in the third quarter, and then re-exerts in the fourth quarter. Note: SEMI discontinued the book-to-bill report because of changes in how companies report data, but the long-term historical trend likely still rings true.
Semiconductor stocks' performance follows a similar pattern. The XSD's average monthly returns decline in the third quarter, but they accelerate in the fourth quarter through February as investor optimism over rising bookings builds.
Given semiconductor stocks are down sharply this year and better days may be ahead, it could be time to start tucking some of them into portfolios. For this reason, here are three companies to consider buying.
No. 1: Advanced Micro Devices
Advanced Micro Devices (AMD) produces microprocessor chips for PCs, laptops, and servers. It also markets graphics cards for computers and gaming consoles. Last year, investors couldn’t pack enough AMD shares into portfolios; however, that changed in November. Since then, shares are down 47% on concern demand will soften, especially in PCs.
Admittedly, concerns over slowing demand aren't misplaced. According to Gartner, consumer PC shipments will decline 9.5% this year, with consumer shipments falling 13.1% and business PCs falling 7.2%.
Nevertheless, there's considerable strength in other parts of its business. For example, first-quarter results showed data center and console demand remained strong, prompting management to boost full-year revenue guidance to $26.3 billion, up 60% from 2021. In Q1, revenue and earnings per share outpaced analysts’ outlook by 6% and 21%, respectively. The bottom line performance marked the eighth consecutive quarter AMD beat Wall Street’s earnings estimates.
AMD releases its second-quarter earnings on August 2nd, so its shares could be volatile over the coming weeks. How it acts following its earnings will likely depend on what it says about server demand (EPYC server revenue has doubled for three consecutive quarters) and the progress it’s making in integrating Xilinx. As a reminder, it acquired Xilinx in February to deepen its penetration into artificial intelligence, data center, and automotive markets.
Real Money’s technical expert Bruce Kamich thinks the charts make AMD a compelling stock to buy.
In “AMD Could Rally 30% From Here,” he writes: “Prices have closed above the declining 50-day moving average line. The daily On-Balance-Volume (OBV) line has turned up strongly in July telling us that buyers of AMD are now more aggressive. The Moving Average Convergence Divergence (MACD) oscillator has turned upwards at a higher low than in early May for a bullish divergence. AMD is now close to crossing above the zero line for an outright buy signal.”
On-Balance-Volume OBV is essentially a running total of up-day volume minus down-day volume, and when it’s trending higher, it suggests buyers are in charge.
The Moving Average Convergence/Divergence (MACD) subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero, or the 9-day EMA.
Kamich also sees improvement in the weekly chart, noting OBV and MACD are tracking favorably. On the point-and-figure chart, Kamich calculates an “upside target of $119 on the daily and $128 on the weekly chart. Overall, Kamich recommends, “Traders could probe the long side of AMD on a dip to around $89 risking to $79. The $120 area is our price target.”
No. 2: Marvel Technology
In early December, Marvel Technology’s (MRVL) shares were trading near $94. Today, they’re trading south of $52. However, similar to AMD, the steep drop in shares may offer investors an intriguing opportunity to buy a fast-growing company at a discount.
In FYQ1, demand for its optical connectivity and data center interconnect chips helped it deliver revenue and earnings growth of 74% and 79%, respectively. Cloud hyperscaler sales resulted in data center sales growth of 131% year-over-year. 5-G rollouts caused 50% year-over-year growth in its carrier infrastructure business, enterprise revenue grew 64% as companies modernize their networks, and automotive grew 94% year-over-year because OEMs are boosting speed because higher bandwidth solutions are being deployed inside vehicles (Marvel supplies eight of the top 10 vehicle manufacturers.)
The company’s second-quarter performance will be updated on August 26th. For perspective, its guidance is for sales of roughly $1.5 billion in the quarter, up from $1.08 billion in FYQ2 last year, and EPS of $0.56, up from $0.34 last year.
In “Marvell Technology Is Breaking Its Downtrend: Time to Buy,” Kamich notes:
“In the daily bar chart of MRVL below shows that the shares are breaking the downtrend from the early January high (not drawn). Prices are trading above the declining 50-day moving average line. The 200-day line has a negative slope and intersects around $66 or so.
The On-Balance-Volume (OBV) line has broken its downtrend from early January and tells us of a shift from aggressive selling to aggressive buying. The Moving Average Convergence Divergence (MACD) oscillator is pointed up and close to crossing above the zero line for an outright buy signal.
How far does he think shares could rally? His analysis suggests a $78 target, leading him to conclude, “Traders could go long MRVL on a shallow two-day dip risking below $49. The $78 area is our price objective for now.”
No. 3: ASML Holding N.V.
Like the other two, it’s been tough sledding for ASML investors this year. Shares are down about 38% since last fall; however, it could be one of the biggest beneficiaries if the CHIPS Act passes Congress.
ASML is the leader in expensive lithography machines necessary for semiconductor production. Its next-generation devices, designed to produce increasingly smaller and more powerful chips, cost about $164 million each.
This year, building these complex machines has been tougher than usual because of supply chain constraints. This week, ASML reported Q2 sales grew less than expected because of delays.
To keep customers happy, ASML is delivering unfinished machines to them. This policy helps customers ramp production more quickly but, unfortunately, ASML can't book revenue on those machines until they're complete. As a result, management expects full-year sales growth of only 10% this year.
The good news, however, is the company will eventually pocket that delayed revenue. It estimates that 2.8 billion Euros of delayed sales will be reported next year, up from its previous 1 billion Euros forecast.
In Q2, ASML's net bookings were 8.5 billion Euros, up from 7 billion one year ago, so demand for its lithography machines doesn't appear to be a problem. Therefore, while the short-term pain associated with the backlog is a headwind, sales could increase more substantially next year. If the CHIPS Act passes and fabs get built, orders could swell.
In “ASML Could Be Poised for Further Gains,” Kamich writes:
“In this daily bar chart of ASML, below, we can see that prices made a low in early July and have rebounded so far to the 50-day moving average line. Trading volume was heavy at the early July low. The On-Balance-Volume (OBV) line shows a decline from September but a recent bottom pattern in early July. The Moving Average Convergence Divergence (MACD) oscillator has crossed to the upside after touching the same low as in May. This movement in the MACD oscillator is a bullish divergence when compared to prices making lower lows.”
His upside targets for ASML are $676 on the daily point-and-figure chart, prompting him to conclude, “traders could probe the long side of ASML on a dip or pullback to $480. Risk below $450.”
The Smart Play
AMD and Marvel still have to report their latest quarterly results, and ASML has some operational setbacks to overcome, so spreading out your buys makes sense.
For example, if you're allocating 3% of your portfolio to each of these positions, consider buying 1% now, and then increasing your position opportunistically. If AMD and Marvel sell off following earnings, you can use weakness to round out your position, and if shares rally, you’ll still benefit from owning a little of each of them.
Overall, these stocks could still face some headwinds this quarter. Nevertheless, given the improving book-to-bill and seasonal tailwinds in the fourth quarter and the potential passage of the CHIPS Act, buying these stocks on sale this quarter for longer-term upside makes sense.