Macquarie Calls Out Intel, Micron As Semiconductor Standouts

Research firm Macquarie started coverage of the semiconductor sector with a mixed view of the space. While the sector's fundamentals are "healthy" and it should generate 9.5% growth amid strong demand this year, its year-over-year growth and its M&A momentum are poised to slow in coming months, the firm stated. It started coverage of Intel (INTC) and Micron (MU) with Buy ratings and initiated coverage of AMD (AMD) and NVIDIA (NVDA) with Neutral ratings.

INTEL: Intel's server unit will be boosted by the release of its new Purley chips, wrote Macquarie analyst Srini Pajjuri. Previous server chip refreshes caused the products' average selling prices to increase by 5%-6%, and Purley could benefit from a similar trend, the analyst stated. In PCs, AMD could gain some share in "the enthusiast/gaming segment," but it probably won't improve its performance much in the "mainstream consumer and corporate segments," the analyst stated. As a result, Intel's PC unit could surpass the company's guidance of a revenue decline of about 5% this year, Pajjuri believes. The fact that Intel plans to continue to build 14 nm chips this year, instead of switching to another size, should boost its margins by one or two percentage points, according to Pajjuri, who set a $40 price target on the stock. MICRON: Micron should continue to benefit from tight supplies of flash memory products and "resilient" pricing for the rest of the year, Pajjuri contended. Amid "healthy demand" for DRAM flash memory in multiple markets, the company's supply/demand dynamics should remain balanced into 2018, the analyst predicted. Furthermore, Micron's technology and costs are becoming more closely aligned with those of the industry leaders, the analyst stated. Pajjuri added that Micron's peak margins should come in ten points higher this cycle than last cycle, but the stock's valuation is 40% below the peak of last cycle. He set a $35 price target on the shares. AMD: The company's balance sheet has improved, it has generated new revenue streams, and its new products "appear competitive," but at current prices, the stock implies that AMD will gain about 20% of share in the high-end desktop market and about 10% of share in the server market, and achieving those levels will be "challenging" given Intel's positioning, Pajjuri stated. Specifically, the giant chip maker is launching new products in 2H17 and if AMD does gain significant share, Intel could respond by lowering prices, limiting AMD's profitability, warned Pajjuri, who set a $14 price target on AMD.

NVIDIA: The chip maker has a leading position in multiple high growth markets, including gaming, AI and autonomous cars, Pajjuri. believes. As a result, it is "the best secular growth story in large-cap semis," he wrote, However, according to the analyst, the company's ability to beat estimates in the near-term is "limited," as it's not expected to launch key new products this year, hampering its ability to raise prices. He advises investors to await a better entry point and set a $110 price target on NVIDIA shares.

OTHER STOCKS: Pajjuri also started coverage of the following companies with Outperform ratings: Maxim Integrated (MXIM), Skyworks (SWKS), Broadcom (AVGO), and Cavium (CAVM),

PRICE ACTION: In morning trading, Intel added 0.5% to $35.92, Micron rose 0.4% to $29, AMD gained 3% to $14.50, and NVIDIA slid 0.7% to $108.67 per share.