Intel and Broadcom shares have the potential to shoot up to a new 10-year high on the back of the semiconductor industry seeing an inventory correction after a medium-term year-over year revenue expansion phase, according to Jefferies. The analysts at Jefferies assigned a Buy rating to both stocks with a 12-month price target of $48 and $55 to Intel and Broadcom respectively.
Why revenue outlook is weaker
The sell-side firm tracked information on 30 semiconductor companies and concluded that around two-thirds of them had revenue outlooks of 5% below expectations, leading to reduced estimates for most semis. A critical question here is if the lower outlook is on the back of weaker demand or just an inventory correction.
On the basis of quarterly data from the past 15 years, Jefferies analysts prepared a chart showing the year over year revenue growth trends of the semiconductor industry and their original equipment manufacturer customers. The data does not include memory players and Intel (due to its massive size compared to the other chip makers).
Excluding Intel, there were at least ten medium-sized, four quarters-or-more, cycles in which semiconductors and OEMs did not align with industrial growth patterns. Semiconductor inventories were declining when the industry was behind the OEMs and vice versa.
What makes Intel and others a Buy?
Mark Lipacis, a senior analyst at Jefferies who tracks semiconductors, talked about two observations from the chart. First of all, the chart suggests that the magnitude of the recent inventory cycle is below that of the past and that the most recent drop in inventory started in the December quarter.
According to Lipacis, now semis are under-supplying based on their June quarter guidance. Additionally, the sell-side consensus is anticipating that players in the industry will supply less than demand through the September quarter, which would make it a full fourth quarter of sublimatory correction, believes the analyst.
However, Jefferies, noting that Intel and Taiwan Semiconductor Mfg. Co. Ltd increased their capex during the quarter, suggested a pattern particular to the semiconductor industry, in which they incorrectly add capacity during an increase in inventory and inappropriately lower capacity during inventory corrections.
Hence, Lipacis feels that it is the right time to buy a semiconductor stock on the basis of the recent correction. The Jefferies analyst recommends Broadcom, NXP Semiconductors, Intel, Maxim Integrated Products and M/A-COM Technology Solutions.
