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MIcrochip Technology, Sensata, and Lam Research could be safer bets among chip stocks.
Dreamstime
Morgan Stanley says chip-stock investors should get more defensive as the likelihood for a broad-based downturn is rising.
On Friday, analyst Joseph Moore lowered his 2023 earnings estimates for the sector, citing the economic risks.
A macro deceleration next year “seems inevitable,” he wrote. “We are relatively positive on analog names as a later cycle pay, focusing on low valuations for numbers that are likely to be relatively durable in a downturn.”
Morgan Stanley’s Moore said
Microchip Technology
(ticker:
MCHP
) and
ST
) are his top two Overweight-rated ideas for broad-based chip suppliers. He has an $81 price target on Microchip, and a $57 stock forecast for Sensata.
These two analog-chip companies may be more resilient than other chip companies because of their diverse exposure to the automotive and industrial segments, where demand has been better than in other areas.
Microchip has “one of the best operating models and broadest portfolios in semis,” he wrote. For Sensata, he’s optimistic about the company’s exposure to the electric-vehicle market.
He also cited how both companies have reasonable valuations, compared with other, more-growth-oriented stocks in the chip sector that could have higher risk in a slowing economy. Microchip and Sensata both trade at about 12 times Wall Street’s earnings estimates for the next four quarters.
Moore also recommends semiconductor capital-equipment companies, which he believes can grow earnings even during difficult times. His top idea in the space is
LRCX
) because it will likely take market share in a number of key new memory-making technologies.
Perhaps, the downturn may have already started. Earlier this week,
Intel
(INTC) management surprised investors at a technology conference by admitting the slowing global economy is hurting its business. On “the macro side, clearly it’s weaker,” Chief Financial Officer David Zinsner said at a Bank of America technology conference on Tuesday. Customer-inventory reductions and component-supply issues have been “much worse than what we had anticipated.”
Ultimately, if the economy gets much worse, these lesser-known semiconductor companies Morgan Stanley recommends may be the better investments.
Write to Tae Kim at [email protected]
Source: https://www.barrons.com/articles/chip-stocks-buys-microchip-sensata-lam-51654887463?siteid=yhoof2&yptr=yahoo