Wall Street firm BofA Securities on Friday identified seven semiconductor stocks that it believes can withstand the current market downturn, including ON Semiconductor (ON). ON stock jumped on Friday.
In a note to clients, BofA analysts Vivek Arya, Didier Scemama and Simon Woo said semiconductor stocks appear oversold, based on historical averages. They noted that chip stocks usually turn higher six months or more ahead of an upturn in demand.
The analysts predicted the Philadelphia semiconductor index, known as SOX, could bottom in the fourth quarter. The SOX includes the 30 largest semiconductor stocks traded in the U.S.
BofA forecast semiconductor industry sales rising just 2% this year to $566 billion worldwide. That’s down from its prior forecast for 10% growth. It noted weakening sales of memory chips and semiconductors for consumer devices, including PCs and Android smartphones.
For 2023, BofA now sees semiconductor industry sales falling 4%, vs. its prior estimate for a 1% decline.
‘Higher Conviction’ Semiconductor Stocks
In the current part of the chip cycle, the BofA analysts said they prefer semiconductor stocks exposed to cars, foundries and networking. They are steering away from those exposed to cloud computing and semiconductor equipment.
BofA says it has “near-term, higher conviction” in seven semiconductor stocks. They include four chip stocks with heavy exposure to the automotive sector: Analog Devices (ADI), NXP Semiconductors (NXPI), ON Semiconductor and STMicroelectronics (STM). Those stocks are benefiting from increased chip content in cars for electric vehicles and advanced driver-assistance systems.
The firm also likes GlobalFoundries (GFS) in the contract chip manufacturing sector. In the networking gear space, BofA named Broadcom (AVGO) and Marvell Technology (MRVL) as top picks.
ON Semiconductor, also known as Onsemi, and GlobalFoundries are on IBD’s Tech Leaders stock list. ON stock also is on the IBD 50 list of top-performing growth stocks.
In trading on the stock market today, ON stock rose 1.6% to close at 71.67.
Three Long-Term Drivers Seen
“Chip stocks are at a tricky intersection because of the asynchronous nature of this downturn,” BofA analysts said. Semiconductor firms are acknowledging weakness in consumer markets, but cloud, enterprise, automotive and industrial markets are holding up.
In the long term, BofA sees three structural growth themes for semiconductor stocks. They are: cloud, cars and capex. Capex is short for capital expenditures as chipmakers are seen buying more production equipment to meet demand.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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