Why These Will Be the Top 5 Chip Gainers in 2013
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chips have always been one of the best derivative plays on the market. This was the case when Intel and AMD rode the coattails of Microsoft and some of the biggest PC names over the past decade. But now it’s over. PCs are (in fact) dying left and right, as evident by the 9% decline in Microsoft’s fiscal Q1 report. But it’s only going to get worse.
The good news is that chips have found new homes. Mobile devices are now dominating the market. However, this hasn’t exactly made it a breathtaking year for the group either. Although the entire tech sector is up 22% YTD, semiconductors have struggled to hold their gains, which are only 5% on the year.
Chronicling the cause for the weak performance would be too time-consuming. Aside from slumping PC sales, weaknesses in telecom equipment and in the industrial end-markets have also hurt. But suffice it to say, only a few names will be able to produce market beating performances in 2013. Here are a few candidates.
Atmel (NASDAQ: ATML)
At the top of my list is Atmel. Since reaching a 52-week low of $4.37 in November, the stock has soared 30%. There’s no question it has reached bottom. But where is it heading next? The company’s recent Q3 earnings results proved that there are plenty of growth opportunities yet to tackle. On the other hand, quite a bit needs to go right for Atmel to harvest that value.
Unfortunately, some of these requirements are outside of the company’s control. However, working in Atmel’s favor is its superior product--when compared to rivals. But this also means that its products tend to cost more, which can introduce pricing pressure from cheaper alternatives. Nonetheless, from an up-market standpoint Atmel has the competitive advantage.
This is because average selling prices (ASPs) are higher, which will help the company’s margins. Also, signs of improved profitability are what it’s going to take to compel the Street to believe in the Atmel story. Evidence suggests that analysts are starting to take notice. And investors would be wise to not get left behind.
Intel (NASDAQ: INTC)
Next on the list is Intel. Despite its struggles in mobile, the stock is just too cheap to not like at $20 per share. Plus, one has to wonder how much worse it can get. Also, that the company has just sold $6 billion in bonds to finance a stock buyback program, which now presents very limited downside risk.
In other words, despite the market’s growing pessimism about Intel’s prospects, the company sees value in the shares – so too should investors. And this is not the first time Intel has done this. The last time it bought back its stock, shares surged 45% in two quarters.
Plus, there continues to be rumblings that Apple might adopt Intel in its devices. How true these rumors prove to be remains to be seen. Nonetheless, it is certainly an encouraging sign that the company believes in its business. Does this mean Intel is back? Not exactly. But investors can certainly make money here while it figures itself out.
Nvidia (NASDAQ: NVDA)
This brings us to Nvidia. I believe the company has a chance to rebound in 2013. But unfortunately, Wall Street doesn’t care. The company is finding it difficult to convince analysts that it can transform itself from a legacy video chip operation for PCs into a legitimate mobile player. However, Nvidia’s numbers tell a different story.
Most recently, the company generated net income of $209.1 million, or 33 cents per share on revenues of $1.2 billion – both exceeded analysts’ estimates. Essentially, the company is doing exactly what the Street says it can’t. For now it’s not enough, but soon it will matter. Will it be too late for investors?
Investors should also keep an eye on Nvidia’s Tegra line of chips, which have been gaining meaningful traction. These chips have earned design wins in products from Apple, Google and Microsoft. Also, if Q3 was any indication, the company will continue to steal market share from the likes of Texas Instruments and AMD. Smart investors would be wise to jump on these shares, which are significantly undervalued.
Broadcom (NASDAQ: BRCM)
In many respects, Broadcom presents similar advantages as the other three names above. The company might be one of the best turnaround candidates in 2013 that no one is talking about. On the other hand, the stock is not cheap when compared to a name like Qualcomm. Nonetheless, there's still 30% upside potential here if timed correctly. And its recent performance supports the optimism.
Not only has Broadcom beaten estimates each quarter, but the company is doing so at a record pace, including (most recently) $2 billion in revenue, its highest ever for one quarter. Better still, this represented year-over-year growth of 9%. Also working in the company’s favor is its close relationship with both Apple and Samsung, an advantage that some of its peers don't get to enjoy.
What this means is that Broadcom has a combined 50% exposure to the smartphone market. But it’s not all about chips. Broadcom is also dominant in the network enterprise arena where Cisco serves as one of its biggest customers. What's not to like?
Qualcomm (NASDAQ: QCOM)
Last and certainly not least is Qualcomm. Although the company is often credited for its high exposure to Apple devices, there’s more to the company than that. Qualcomm has (arguably) the best business in the market. And as evident by the company’s most recent quarter, the market has yet to peak.
Revenues soar 18% year-over-year to $4.87 billion, beating analysts’ estimates by a meaningful margin. Remarkably, while other names such as Texas Instruments were revising lower, Qualcomm reported a 1% jump in chip shipments.
And in 2013 things are only expected to get better, supported by the confidence shown by management with raising revenue guidance. Astute investors should be adding shares here in anticipation of a pretty good payday sometime in Q1. It would not surprise me if Qualcomm traded at $75 by this time next year.
This list is far from complete. We could probably venture into other names such as ARM Holdings, but ARM is already at the top of the mountain. Aside from Qualcomm, the names above have been beaten to a degree where a turnaround can be anticipated. Lesser names such as Avago, Maxim and a few others might deserve some mention. While the names are abundant, making money on your investments requires having a real understanding of the advantages and disadvantages that each present.
rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!