Zacks Industry Outlook Highlights: NVIDIA and Texas Instruments

Dee Yonker

For Immediate Release

Chicago, IL – December 23, 2020 – Today, Zacks Equity Research discusses the Semiconductors, including NVIDIA Corp. NVDA and Texas Instruments TXN.

Industry: Semiconductors


Companies in the Semiconductor – General industry are at the forefront of the ongoing technological revolution based on HPC, AI, automated driving, IoT and so on. These semiconductors also enable the cloud to function and help analyze the data into actionable insights that can be used by companies to operate more efficiently. 

If anything, the pandemic has strengthened the conviction that these technological changes are required and inevitable. Because it is the technology platforms that enabled us to function when it was unsafe for us to go to work or meet people. So the transfer of work to the cloud may now be expected to accelerate, further driving demand for semiconductors.

NVIDIA has pioneered and built a whole lot of this cutting-edge technology, so it remains a top recommendation in this group. Texas Instruments is more of a defensive play, but a very steady performer as well.

About The Industry

The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete, like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs and analog serving multiple end markets. The industry includes companies like NVIDIA, Texas Instruments, Intel and STMicroelectronics.

According to the latest sales statistics from the Semiconductor Industry Association (SIA), semiconductor sales in October grew 6.0% year over year, with the Americas growing 14.2%, China 6.3% and Asia Pacific/All Other 5.3%. Europe and Japan sales declined 4.8% and 1.0%, respectively. The SIA/WSTS forecast semiconductor sales growth of 5.1% this year and 8.4% in 2021.

Here are the major themes shaping the industry –

  • Being on the building-block side of technology, the industry stands to benefit from the proliferation of the Internet and the growing digitization of our lives, irrespective of the direction we move in the future. So, if the change in the way we are doing things during the pandemic becomes more permanent, it will have a profound impact on the semiconductor industry that may necessitate the reallocation of resources to areas of greater demand. Smartphones (IDC expects 2.4% growth in Q4 with impressive supply chain recovery after first-half pandemic-driven pressures and 4.4% growth in 2021. Incentives from OEMS and channels will drive 5G growth. Gartner expects 3.3% growth, 12% of which will be 5G) and PCs (home entertainment and distance learning attributed for resurgence in this market by Gartner. Businesses buying PCs with caution for employees working from home) are still the biggest consumers of chips. AI should grow (PWC expects a 50% CAGR between 2019 and 2022, albeit off a relatively small base of $6 billion). In IoT, which is still evolving, ResearchAndMarkets has a longer-term forecast: 31.4% CAGR between 2020 and 2027. Automotive electronics is another area of evolving needs and strong growth potential (Grand View Research estimates a 9% CAGR in 2020-2027, driven by safety systems, ADAS, hybrids, energy storage). Automation and robotics, with increasing adoption across industrial operations are other areas of growth. So there is plenty of scope for reallocation that will take place over the next few years.
  • Because of the growth potential in emerging markets, regulatory (and/or political) issues in China and the U.S., can play an increasingly important role. The government’s strong stance against prime trading partner China has cast a shadow over the space. Semiconductor companies in particular stand to benefit from a truce between the U.S. and China as the Chinese government’s drive to build its own industry would have required plenty of collaborations with leading semiconductor players. Moreover, commercial sales to China would have helped fund costly R&D in the U.S. The government is more concerned about IP protection and is trying to delay as far as possible, China’s own technological maturity. This is particularly negative for the industry because semiconductors typically go into manufacturing devices, the largest chunk of which is made in China.
  • Because end devices have to be priced lower to reach more people, the pressure on companies to bring down cost will remain. So companies will find it advantageous to move operations to places where labor may be cheaper or the proximity to manufacturing facilities can lower transportation and other cost. Industry consolidation is also likely to continue as larger players add expertise through acquisitions. There’s also likely to be close collaboration with device makers, facilitating quicker consumption and better inventory management.   

Zacks Industry Rank Indicates Caution May Be In Order

The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #185, which places it in the bottom 27% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates uncertain near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

An industry’s positioning in the bottom 50% of the Zacks-ranked industries is normally because the earnings outlook for the constituent companies in aggregate is not encouraging. In this case, while the 2020 estimates have continued to grow from pre-pandemic levels, the 2021 estimate remains below this level, indicating a correction in demand or cost increases.

Looking at the aggregate earnings estimate revisions, it appears that analysts are increasingly positive about the industry’s growth prospects. As a result, the aggregate earnings estimate for 2020 has grown 6.1% over the past year while the estimate for 2021 is down 1.8%.                                

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Leads on Stock Market Performance

Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has traded between the broader Zacks Computer and Technology Sector and the S&P 500 index through most of the past year.

The industry gained 33.6% over the past year compared to the 38.7% gain of the broader sector and the 17.1% gain of the S&P 500 index.

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing semiconductor companies, we see that the industry is currently trading at 22.55X, which is between its median value and highest level achieved in the past year, but below the S&P 500’s 23.05X and the sector’s forward-12-month P/E of 28.10X.

Over the last five years, the industry has traded as high as 23.01X, as low as 12.86X and at the median of 16.63X, as the chart below shows.

2 Stocks Worth Considering

The industry doesn’t have a whole lot of buy-ranked stocks. In fact NVIDIA is the only one. But Texas Instruments is also a good stock, albeit a defensive one given that it continues to deliver the goods quarter upon quarter and year after year. It rarely has a bad quarter and rarely an exceptional one. Since it’s a steady performer, it’s also included here.

NVIDIA Corp.: NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. As the GPU’s parallel processing capabilities were increasingly found to be even more effective for complex computing applications, the company saw its addressable market expand. Today, it is these chips that drive the high performance computations in not only gaming but also in a variety of other applications like artificial intelligence and virtual reality. Considering the scope of application and the fact that these are all at the cutting edge of technology, the company should see sustained growth for years to come.

After acquiring Mellanox for $7 billion earlier this year, the company has cemented its competitive moat against Intel in AI and HPC, the two most happening areas with the greatest growth potential. So it is now even better positioned for growth.

Third quarter results topped the Zacks Consensus Estimate by 13.2% in the last quarter, after which the current year EPS estimate of this Zacks Rank #2 (Buy) stock increased 6.4% from $9.13 to $9.71.

The shares are up 123.3% over the past year.

Texas Instruments: TI is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits. The company serves diverse end markets where demand typically balances out to generate the steady results it is known for. Its manufacturing strategy involves base demand mature processes of its own where it maintains high utilization rates. This is supplemented with external foundries when demand increases sufficiently. So it’s a very well-run business.

Third quarter results topped the Zacks Consensus Estimate by 14.2% in the last quarter, after which the current year EPS estimate of this Zacks Rank #2 (Buy) stock increased 7.7% from $5.08 to $5.47.

The shares of the Zacks #3 (Hold) ranked company are up 26.4% over the past year.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit information about the performance numbers displayed in this press release.

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