Hedge Funds Are Piling Into These Semiconductor Stocks

The semiconductor industry has seen some exciting times. The advancement in technology that created new end markets for semiconductors beyond the PC and smartphone space, such as Artificial Intelligence, Internet of Things and autonomous vehicles. This suggests that the demand for semiconductors will remain robust in years to come. In 2017, the semiconductor industry saw a growth of 19% to 20% last year, which was exceptional and many analysts believe that favorable market conditions will persist, even though growth will slow down. For example, Gartner has doubled its revenue growth forecast to 7.5%, projecting the global market to $451 billion.

However, despite the positive industry outlook, semiconductor companies will face a number of challenges. Moore’s law, an observation made in 1965 by Intel Corporation (NASDAQ:INTC) CEO Gordon Moore that predicted that the number of transistors per square inch on integrated circuits would double every two years (later revised to 18 months), is showing signs of slow down, with Intel itself saying that it has slowed down the pace at which it releases new chip-making technology. As physical limitations of semiconductors are starting to apply, chipmakers will have to appeal to software and applications to improve the efficiency of semiconductors. Given that technology like AI, IoT and autonomous vehicles require a lot of computing power, semiconductor companies will have to ramp up their R&D spending in order to deal with the demand.

Cyber security is another issue faced by the semiconductor industry. Earlier this year, the industry made headlines when it was discovered that certain processors have some major security flaws, which would allow attackers to bypass security protocols and read data stored in memory. Tech companies released software to patch the vulnerabilities and semiconductor makers should make it a priority to integrate security protocols at the hardware level without affecting the performance and the security of hardware will remain one of the priorities for chipmakers in the foreseeable future, as attacks become more sophisticated as well.

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Companies have found one way to both address their challenges and remain relevant in the continuously-evolving semiconductor market: consolidation. In the last several years, we have witnessed a major wave of M&A activity in the semiconductor industry. Among the major deals were the $37 billion Avago – Broadcom Ltd (NASDAQ:AVGO) deal, the acquisition of Freescale by NXP Semiconductors NV (NASDAQ:NXPI) and Intel Corporation (NASDAQ:INTC)’s purchase of Mobileye and Altera in deals worth a combined $32 billion. Some acquisitions are still ongoing, such as QUALCOMM, Inc. (NASDAQ:QCOM)‘s $44 billion bid for NXP Semiconductors NV (NASDAQ:NXPI). The pinnacle of the consolidation wave was considered Broadcom Ltd (NASDAQ:AVGO)’s $117 billion bid to acquire QUALCOMM, Inc. (NASDAQ:QCOM), but the deal was blocked by the White House, citing national security concerns. Given that previously the President had blocked for similar reasons the acquisition of Lattice Semiconductor by Canyon Bridge Capital Partners and the unprecedented amount of deals in the last couple of years, the M&A activity is expected to die down over the next few years. However, the consolidation has provided chipmakers with lots of benefits in terms of economies of scale and diversification, which allowed companies to cut down on costs and expand product lines.

In this way, semiconductor companies look like very good investments, given the optimistic growth prospects and latest trends. Hedge funds are keeping an eye on semiconductors and over the past year have been piling into many companies, particularly those that are among the industry leaders. At Insider Monkey, we monitor the hedge fund sentiment by keeping track of the number of funds invested in several thousand companies at the end of every quarter. Following this activity can help smaller investors beat the market without having to invest in hedge funds. We have developed a strategy that identifies the best small-cap stocks to invest in based on their popularity among best-performing hedge funds. We share the stock picks from our strategy in quarterly premium newsletters. In addition, we have launched a monthly activist newsletter that focuses on one of 140 activist funds and discusses best ways to imitate those hedge funds in eight out of 12 issues (the other four issues provide an analysis of stocks that are most popular among activists).

Having said that, let’s take a closer look at four most popular semiconductor stocks among the hedge funds in our database. We will skip NXP Semiconductors NV (NASDAQ:NXPI), which ranks as the most popular stock, with 92 funds holding shares as of the end of 2017, due to the fact that it is currently being acquired by QUALCOMM, Inc. (NASDAQ:QCOM).

The number of funds from our database long Applied Materials, Inc. (NASDAQ:AMAT) declined by 10 during the fourth quarter to 61 funds at the end of the year, up from 47 funds at the end of 2016. Over the past 12 months, Applied Materials, Inc. (NASDAQ:AMAT)’s stock surged by 43%, amid excellent performance. In its fiscal first quarter (ended January 28), Applied Materials, Inc. (NASDAQ:AMAT) registered EPS of $1.06, which beat the estimates by $0.08. In addition, the company’s revenue went up by 28% on the year to a record of $4.20 billion and topped the consensus estimate by $80 million. Applied Materials, Inc. (NASDAQ:AMAT) also doubled its dividend to $0.20 and increased its stock buyback program by $6 billion in addition to $2.80 billion under a previous authorization.

In QUALCOMM, Inc. (NASDAQ:QCOM) there are 70 investors in our database holding shares as of the end of 2017, up by seven over the year. During the fourth quarter, the number of funds bullish on QUALCOMM, Inc. (NASDAQ:QCOM) jumped by 29, which can be explained by Broadcom Ltd (NASDAQ:AVGO)’s unsolicited bid to acquire it for $103 billion announced in November. Over the next couple of months, Broadcom Ltd (NASDAQ:AVGO) tried to pursue a hostile takeover and even raised the offer, but in the end, the Committee on Foreign Investment in the United States (CFIUS) stepped in and on March 12, President Trump killed the deal on grounds of national security concerns. QUALCOMM, Inc. (NASDAQ:QCOM)’s stock tanked after the takeover was cancelled, which brought the stock closer to its real valuation. QUALCOMM, Inc. (NASDAQ:QCOM) is also currently acquiring NXP Semiconductors NV (NASDAQ:NXPI), as we’ve mentioned earlier and has recently raised its offer to $127.50 per share from $110 per share following pressure from major NXP Semiconductors investors, including Paul Singer’s Elliott Management.

Micron Technology, Inc. (NASDAQ:MU) saw 80 funds long its stock heading into 2018, up by nine over the quarter and by 13 over the year. Since the beginning of the year, Micron Technology, Inc. (NASDAQ:MU)’s stock has advanced by 20% and the company has recently reported its financial results for the fiscal second quarter. Both EPS of $2.82 and revenue of $7.35 billion topped the estimates by $0.08 and $70 million, respectively, with revenue also growing by 58% on the year. Micron Technology, Inc. (NASDAQ:MU) also issued a strong guidance for the fiscal third-quarter with revenue in the range of $7.20 and $7.60 billion and EPS between $2.76 and $2.90. For the current calendar year, Micron Technology, Inc. (NASDAQ:MU) expects DRAM supply growth at 20% and NAND growth at 45% and the company expects to see in-line performance in DRAM space and slightly above the industry average growth in NAND. Following the results, a number of analysts upgraded or raised their price targets on Micron Technology, Inc. (NASDAQ:MU)’s stock, but Citi analysts downgraded the stock to ‘Neutral’ from ‘Buy’ citing concerns regarding the decline in NAND memory prices

Last but not least, Broadcom Ltd (NASDAQ:AVGO) is the second most popular semiconductor stock among the funds in our database and one of the top dividend picks among hedge funds, as there were 83 investors bullish on the company at the end of 2017, up by nine over the quarter and by 10 funds compared to the end of the previous year. Last year, Broadcom Ltd (NASDAQ:AVGO) completed the acquisition of Brocade Communications Systems, which allowed it to expand its presence in the data center products market. Even though Broadcom Ltd (NASDAQ:AVGO)’s acquisition of QUALCOMM, Inc. (NASDAQ:QCOM) failed, Broadcom Ltd (NASDAQ:AVGO) is expected to pursue other acquisitions Marvell Technology Group Ltd. (NASDAQ:MRVL), Xilinx, Inc. (NASDAQ:XLNX), and Analog Devices, Inc. (NASDAQ:ADI) suggested by analysts among potential targets. The company is also moving forward with its redomiciling back to the US from Singapore, with shareholders having recently voted in favor of the move, which is expected to be effective April 4. In addition, earlier this month, Broadcom Ltd (NASDAQ:AVGO) posted better-than-expected results for the last quarter and analysts reinstated coverage on the stock with bullish ratings.

Disclosure: none