Wells Fargo recommended four semiconductor stocks for 2021, arguing the sector’s record highs may be here to stay and that global chip-buying trends will propel the best names to even greater heights.
The sector’s success has lifted the PHLX Semiconductor index, which tracks 30 of the most important names, to its highest valuation multiple in nearly a decade. But Wells Fargo analyst Aaron Rakers said in a Thursday research note that the world’s appetite for chips powering things such as 5G phones and data centers means his four picks have more room to grow.
New phones and continuing demand for more data-center processing power mean equipment manufacturers will need to include significantly more dynamic random access memory, or DRAM, in their products. One of the biggest memory makers, Micron Technologies (ticker: MU), stands to benefit.
Its DRAM is cutting-edge. Rakers’ team predicts that the DRAM sales will power the stock to new heights and raised his target for the stock price to $100 from $85.
Micron’s DRAM is needed in tons of places, such as helping to power artificial-intelligence and machine-learning applications, in next-generation videogame consoles, and in 5G phones, which typically contain more storage and memory than the prior generations of handsets.
The company, Rakers says, generates an increasing amount of non-GAAP free cash flow, and comes with a strong balance sheet. Barron’s likes the name too.
One of Rakers’ other picks, Nvidia (NVDA), will also benefit from the growing appetite for computing power. Its graphics processing chips are well suited to training software working with vast data sets, which then can do things such as translate speech and run virtual assistants. Rakers believes uses for those tools will increase, so he raised his target for the stock price to $625 from $605.
The analyst cautioned, however, that the bet on Nvidia for 2021 is less clear than it was this year, when the company launched its Ampere-based server and videogame chips.
Advanced Micro Devices (AMD) too will benefit from the need for more data-center processors. Its central processing units are already taking market share from rival Intel (INTC). Rakers predicts the trend will continue as it ramps up sales of its Zen-3 Epyc Milan central processing units.
Those chips are also helpful for supercomputing—seen as a cutting-edge area in technology—which benefits the AMD brand. Rakers boosted AMD’s target price to $120 from $100.
Storage producer Western Digital (WDC) was a disappointment in 2020, but Rakers argues it is s ripe for a turnaround in the second half of 2021. His team thinks that the company’s flash-memory business is undervalued and will ship an increasing number of solid-state drives to buyers. Rakers raised his target for the stock price to $65 from $55,
Micron stock was stable at about $72.24 in Friday afternoon trading, Nvidia shares fell 0.8% to $529.53, and AMD stock rose 0.5%. Western Digital rose 1% to $53.98 as the PHLX Semiconductor index notched a gain of 0.2%.
Write to Max A. Cherney at [email protected]