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Morgan Stanley analyst Joseph Moore advocates for a selective approach in the semiconductor sector despite a challenging backdrop. The surge in interest surrounding artificial intelligence (AI) has propelled semiconductor stocks, as evidenced by the 49% year-to-date increase in the Philadelphia Semiconductor Index (SOX). While an inventory correction unfolds, Moore sees the potential for improved fundamentals in the coming months. The analyst urges investors to be discerning in their choices, recommending an overweight position in devices. Here, we explore Moore’s top three semiconductor stock picks and assess their potential.
1. Qorvo, Inc. (QRVO):
- Business Focus: North Carolina-based Qorvo is a leading chip designer and manufacturer with a global footprint. The company specializes in top-end radio frequency (RF) and power chipsets, catering to diverse sectors such as aerospace/defense, IoT, mobile networking, and infrastructure.
- Recent Performance: Qorvo’s recent fiscal performance demonstrated a rebound, with fiscal 2Q24 showing a return to higher revenue levels after a previous downturn. The company’s financials exceeded expectations, indicating positive momentum.
- Analyst’s View: Moore sees Qorvo’s potential for long-term earnings growth, particularly with increased Apple share and recovery in China Android. He notes the stock’s attractive valuation, trading at 10x CY25 EPS. Moore upgrades Qorvo from Equal-weight to Overweight (Buy) with a price target of $134, implying a 29% upside.
2. Ambarella (AMBA):
- Business Focus: Ambarella is a fabless chip company specializing in video application chipsets optimized for image processing and high-resolution video compression. The company’s products find applications in various digital imaging technologies, including wearable cameras, vehicle dash-cams, and autonomous vehicle systems.
- Recent Performance: Ambarella faced a decline in the past year due to inventory correction. However, fiscal 3Q24 results showed an encouraging beat in revenue and narrower-than-expected losses, signaling potential recovery.
- Analyst’s View: Moore is bullish on Ambarella’s long-term risk-reward but remains cautious in the near term due to ongoing inventory correction. He rates Ambarella as Overweight (Buy) with a $67 price target, indicating a 16% upside.
3. Analog Devices, Inc. (ADI):
- Business Focus: Analog Devices is a major player in signal processing and data conversion, offering a diverse portfolio of chipsets used in various applications, including motor control, power monitoring, and industrial ethernet solutions.
- Recent Performance: Despite a 16.3% YoY drop in revenue for fiscal Q423, Analog Devices demonstrated resilience and consistency. The company’s long-standing dividend history and shareholder returns contribute to its investor appeal.
- Analyst’s View: Moore views Analog Devices as a resilient stock with a history of outperforming downcycles. He emphasizes the company’s gross margin resilience and predicts a bottom in the current downcycle by Q2 2024. Analog Devices receives an Overweight (Buy) rating with a $219 price target, suggesting an 18% upside.
Conclusion: Morgan Stanley’s semiconductor stock recommendations reflect a nuanced approach amid the AI-driven surge. While Moore acknowledges challenges, he remains optimistic about the potential for selected semiconductor stocks to outperform in the long term. Investors are encouraged to consider these recommendations in light of evolving market dynamics and the sector’s strategic importance in the era of artificial intelligence.
