What happened
Shares of Qualcomm (QCOM 11.46%), Skyworks Solutions (SWKS 5.45%), and Nvidia (NVDA +0.64%) surged higher Monday morning after international megabank Barclays upgraded two of these name-brand semiconductor stocks -- and raised its price target on the third.
As of 10:30 a.m. ET, Qualcomm has gained 5.4%, Skyworks is up 4.2%, and Nvidia -- the one chip stock that Barclays didn't upgrade (but only because it was already recommending it) -- is rising 4.4%.
NASDAQ: NVDA
Key Data Points
So what
In a wide-ranging report encompassing most of the semiconductor sector, Barclays this morning upgraded both Qualcomm and Skyworks to overweight (i.e., buy), assigning the stocks price targets of $150 per share and $125 per share, respectively. Nvidia, which Barclays was already recommending as overweight, got a higher price target instead of an upgrade -- $250 per share, a 47% improvement over the old target price and one that promises 34% profits within a year to new buyers.
2023 is starting out rough for semiconductor investors -- but that's OK with Barclays, which is already looking ahead to 2024 with a new set of sales and earnings estimates. As the analyst reasons, chips suppliers to data centers, PC manufacturers, and mobile phone producers are likely to see better demand as the year progresses, with demand potentially improving in China in the second half of this year.
It's not all good news, however.
Warning that new car demand is just starting to fall apart, and fearing the effects of a recession on industrial demand, Barclays has a negative outlook on analog chipmakers this year. It's also curiously negative on companies that manufacture equipment for the production of semiconductor chips -- names like KLA Corporation and Applied Materials, both of which Barclays downgraded to underweight (i.e., sell) today. You might think that semiconductor companies would buy lots of equipment ahead of a resumption of demand for their products, but Barclays isn't so sure about that, warning investors not to be lulled by strong earnings at these companies early this year.
Now what
So what's an investor to make of this information?
If Barclays is right and any slump on semis will be short-lived, then Skyworks stock trading at just 13 times trailing earnings should be a safe bet -- and Qualcomm at less than 11 times earnings even safer. Nvidia stock, though, costs closer to 74 times trailing earnings today, which still seems pretty pricey. But of the three chipmakers named, Nvidia is the only one for which analysts are currently forecasting a long-term earnings growth rate in the double digits -- 21% annualized over the next five years.
That's still not fast enough to justify the valuation, in my opinion, but it's a fact worth considering.
As for the semiconductor equipment makers, I have to admit that I find Applied Materials pretty tempting at less than 15 times earnings -- Barclays' warning notwithstanding. KLA, however, both costs more than Applied Materials (about 25% more at a P/E ratio of 18.7) and has a much slower projected long-term growth rate (3% versus Applied's 10%).
In fact, out of all the stocks named above, I'm inclined to ignore Barclays' advice today and pick Applied Materials as the one most likely to outperform in the long term.
