The semiconductor industry as a whole may be entering a cyclical downturn, Bank of America analysts warned in a note Wednesday, but beneath surface they see opportunities to be had. Notably for the Investing Club, the analysts at BofA are keeping a buy rating on the three chip stocks in their coverage universe that are in Jim Cramer’s Charitable Trust portfolio: Nvidia (NVDA), Advanced Micro Devices (AMD) and Marvell Technology (MRVL). The Trust portfolio is what we use for the Club. Big picture Semiconductors have historically been a cyclical industry, seeing sales slowdowns every few years that appear to be related to the pace of global GDP growth. Now, of course, there’s all sorts of concerns about global growth, and Bank of America believes chip sales will take a hit this time, too. The analysts, Vivek Arya and Blake Friedman, now project global semi sales of $608 billion in 2022, representing a 9.5% year over year increase. Previously, they expected revenue to increase 13% compared with 2021. For 2023, they expect total semi sales of $604 billion, down 1% compared with their 2022 forecast. Their old projections called for sales to increase 7% in 2023. Despite these topline revisions, Arya and Friedman see some factors providing relative support for chips. “Tighter global monetary policy, geopolitical turmoil and consumer weakness is likely to pressure 2HCY22/CY23E chip demand. However, unit weakness could be cushioned by richer non-consumer mix, robust pricing, expanding content, and constrained supply,” they write. (Note: 2HCY22/CY23E stands for second half of calendar year 2022 and estimates for calendar year 2023.) The details When you go underneath the hood, the BofA note’s contents aren’t so bad for the trio of Club stocks mentioned earlier: Nvidia, AMD and Marvell. Yes, the analysts cut their price targets on each of them as they lowered earnings and sales outlooks for 2022 and 2023. But since the stocks have dropped so much in the recent market turmoil, the new price targets actually represent significant upside compared to Tuesday’s close. Thus, the Bank of America analysts continue to rate each of them as buys. Nvidia price target: $220 per share, down from $270. Roughly 37% upside from prior close. AMD: $110 per share, down from $160. Roughly 36% upside. Marvell: $60 per share, lowered from $90. Roughly 32% upside. We’re not necessarily comforted by the specifics of those price targets, but rather the reasons supporting BofA’s belief that the stocks can be bought here. That’s what is the most important. One of those reasons is that all three stocks have large exposure to cloud computing and artificial intelligence, which the analysts consider one of their favorite structural themes. In general, the analysts believe that non-consumer sales of non-memory chips will hold up better than consumer end markets, which include personal computers, smartphones and gaming graphics processing units (GPUs). As a reminder, the growth of data center market is a major contributor to our favorable view on Marvell, AMD and Nvidia. Marvell, in particular, has the least consumer exposure of the three. AMD does have PC exposure, but the company has recently focused its efforts more on the higher-performance computers that corporations and gamers buy instead of lower-end consumer products, where demand is believed to be softer. We recognize AMD and Nvidia both sell gaming GPUs and that part of their business could slow compared to the strong growth its seen during the pandemic. But, as noted above, we think data center should be resilient, and the secular shift to the cloud also remains intact. Another key reason Bank of America sees them as worth buying here is related to the idea that stocks are forward-looking assets. Chip stocks have already been crushed this year, in part, because many investors think an economic slowdown is on the horizon. As a result, they have recalibrated their expectations for future earnings and what they’re willing to pay for them, leading to the valuations of semi stocks to compress. The PHLX Semiconductor Sector Index , known as the SOX, has seen its forward earnings multiple fall considerably since late last year. According to BofA, the SOX’s forward PE has fallen about 42% from its cycle peak, compared to an average decline of 26% in the past four downturns. This, the analysts write, suggests “valuations may bottom shortly.” “For instance semi sales were fine in CY18 but the SOX declined, anticipating the CY19 downturn. The Sox index however surged 60% in CY19 despite weaker sales since most of the selling had already taken place in CY18,” the analysts also write. (Again, note that CY18 means calendar year 2018.) We look at the situation similarly to the Bank of America analysts. The Club has a 1 rating on Nvidia, Marvell and AMD, meaning we view them as buys . These stocks have come down so much — all three hit new 52-week lows Wednesday and are down at least 45% year to date — we think it’s more prudent to be looking for opportunities to buy, rather than sell any shares at these low levels. Bottom line Semiconductor companies often get lumped together and see their stocks move in relatively similar directions. However, we believe, in due time there will be separation, as it becomes clear that certain end markets for chips are doing better than others. “My experience is, initially, they trade together and then they begin to separate. You separate the wheat from the chaff,” Jim Cramer said during Wednesday’s “Morning Meeting.” (Jim Cramer’s Charitable Trust is long NVDA, AMD and MRVL . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
