Upgrades and Downgrades: Semiconductor Edition

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

There's best, there's worst, and then there's Drexel
This week, we have a (relatively) new analyst stepping onto the stage with a handful of picks and pans in the computer chip industry. Drexel Hamilton hasn't been around Wall Street long. According to S&P Capital IQ, in fact, the firm has only been around since 2008. Drexel just trumpeted its opinion on some of the biggest names in semiconductors -- everyone from Analog Devices (Nasdaq: ADI  ) and Altera (Nasdaq: ALTR  ) , which it likes, all the way up to Intel (Nasdaq: INTC  ) and Micron (Nasdaq: MU  ) , which it doesn't.

You see, according to Drexel, the semiconducting world pretty much revolves around Apple these days. Chip makers blessed with a role in the Apple's latest iPhone offering have a future, says the analyst, while those that don't, don't.

All Apple, all the time
Take Intel for example. Drexel calls Intel's new "3-D Tri-gate manufacturing technique" positively "revolutionary." MIT's Technology Review agrees, by the way, calling Tri-gate "one of the 10 most important technological milestones of the past year." And Fool tech analyst Alex Planes says its "minimal leakage (and, thus, superior power efficiency) could be an insurmountable obstacle for chipmaking rivals and thus ensure Intel's future dominance of the mobile space."

Emphasis on "could," because according to Drexel, lack of support from Apple has instead "stymied" Intel's ability to gain market share for the new product.

On the other hand, Drexel sees new Apple products, and particularly mobile computing devices, helping to increase global demand for NAND flash memory -- and drive the success of Micron. The analyst still isn't optimistic enough about the stock (for reasons that will be apparent when you reach the chart below) to actually recommend buying it. But the fact that Drexel gives profitless, cash-burning Micron even a hold rating speaks volumes of what the analyst thinks about the Apple effect on computer parts-makers.

Hip, hip, hooray for LTE!
Similarly, Drexel believes that the introduction of Apple's new LTE-compatible iPhone 5 will drive the success of 4G chip makers Altera and Analog Devices. Analog, says the analyst, is selling into a market with "lean inventory" and improving profit margins. Drexel predicts we will see "strong channel and OEM purchase activity [of Analog's products] in the weeks ahead" as cell phone providers work to "fulfill seasonal obligations augmenting 4G networks tied to iPhone5's video thrust."

Meanwhile at Altera, Drexel argues that revenue will surge "21.9% in 2013 accompanied by improving gross and operating margins that should extend to further gains in 2014." Drexel notes that alongside rival Xilinx (Nasdaq: XLNX  ) , Altera is part of a duopoly controlling 95% of a market for programmable logic processors. Even better, market dynamics are shifting a greater share of this market toward Altera and away from Xilinx.

So... we should buy these stocks, right?
According to Drexel, yes. While putting Intel and Micron on a shelf for the moment, the analyst is initiating coverage of both Analog Devices and Altera with buy ratings. However, enthusiasm for the iPhone notwithstanding, investors should think twice before following Drexel's advice. To see why, here's the chart I mentioned up above:

Stock

P/E Ratio

Price-to-Free-Cash-Flow

Growth Rate

Analog Devices 19.1 34.0 10.5%
Xilinx 18.8 19.2 13.7%
Altera 19.8 22.7 15.1%
Intel 9.8 22.2 10.7%
Micron Negative Negative 12.9%

Source: finviz.com.

With valuations ranging from 18.8 times earnings for Xilinx, all the way up to infinity for the unprofitable Micron, it's clear that a lot of the enthusiasm for these stocks is already baked into their stock prices. Of the five, only Intel actually looks reasonably priced on a P/E basis -- and even Intel starts to look like an un-Intel-ligent investment once you notice how very little real free cash flow the company is putting out -- less than $9.5 billion, versus reported "net income" of nearly $12.4 billion.

Foolish takeaway
Long story short, and Drexel's opinions notwithstanding, none of these stocks looks particularly attractive at today's prices. Gun to my head, if I had to pick one that looks most likely to be mispriced, I'd have to say it's Micron -- where lack of reported "profits" may be misleading investors, and where the company has been generating positive free cash flow, behind the scenes, for two quarters in a row and may be on a trend of real improvement.

Investors looking at more traditional metrics, on the other hand, may want to focus on Intel, as it's got the best-looking P/E of the bunch. And in fact, if Intel is a stock that interests you, we may be able to help out with that. Read our new premium research report on the company right now, and get the lowdown on whether an investment in Intel is as smart as it looks. The comprehensive report comes with a year of free updates. Click here to get started now.

And find out more about Apple and its ecosystem in our premium report on the iPhone maker.

Fool contributor Rich Smith has no position, long or short, in any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 289 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services have recommended buying shares of Apple and Intel. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2026189, ~/Articles/ArticleHandler.aspx, 12/19/2014 12:45:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement