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Here’s How to Play Chip Stocks After the 2020 Rally - Barron's

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With vaccines finally rolling out, Goldman Sachs is counting on strong global demand for semiconductors amid an expected economic recovery.

Goldman chip analyst Toshiya Hari sees two tailwinds for stocks across the semiconductor sector. First, growth in global gross domestic product correlates with chip company strength. Second, U.S. president-elect Joe Biden’s administration is likely to take actions to unwind trade tensions with China, Hari wrote, and the chip companies he covers have significant sales in China.

The fact that 21 out of the 24 companies Hari’s team covers beat quarterly consensus estimates in the latest quarter and raised future projections is another reason to be positive on chip stocks going forward.

The PHLX Semiconductor index is up 50% this year, and the index trades at 24 times earnings estimates for the next 12 months, according to FactSet, versus a five-year average of 16 times.

Hari wrote that the premium makes sense since the Covid-19 pandemic has accelerated people’s reliance on technology—a trend made possible by chips.

Hari raised target prices across his universe of chip stocks, accounting for this year’s gains and his expectation that there are more to come.

The PHLX Semiconductor index (ticker: SOX) rose 1.4% Tuesday. Intel (INTC) and Nvidia (NVDA) both rose 0.4%, while Advanced Micro Devices was up 2.5%.

ON Semiconductor (ON), one of the stocks Hari is particularly bullish on, was up 1.8% on the day. Hari has a price target of $36 on the stock, 15% above Tuesday’s close.

The company’s CEO Hassane El-Khoury, who took the top spot last week, previously ran Cypress Semiconductor, selling the company to Infineon in 2019 for roughly $10 billion.

Hari noted that the Cypress gained about 100% during El-Khoury’s stewardship, compared with 67% for the PHLX Semiconductor index. El-Khoury made Cypress more profitable and reworked the business to move away from commodity chip products, such as memory and storage, and more toward semiconductors designed for cars.

Hari expects El-Khoury to have similar success at ON Semi.

Goldman’s other favorite chip stocks include Advanced Micro Devices (AMD) and Analog Devices (ADI). Hari’s new price targets suggest 20% of upside for both stocks.

As part of the Goldman’s remapping of coverage, Hari downgraded Dutch chip company NXP Semiconductors (NXPI) to Neutral from Buy. The stock is up 102% since Hari put the company on his Buy list roughly two years ago, compared with the S&P 500’s gain of 32%. The average semi stock Hari covers advanced 90% over the same period.

Write to Max A. Cherney at max.cherney@barrons.com

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