Forget Analog Devices, Buy These 4 Top-Ranked Semis in 2020

Analog Devices ADI had a rough fiscal 2019 due to softness in consumer and industrial end markets. Further, weakness in the automotive market due to a slowdown in global auto sales has been affecting this Zacks Rank #5 (Strong Sell) stock.

In fiscal 2019, which ended on Nov 2, revenues from consumer, industrial and automotive end markets declined 18%, 4% and 8%, respectively, on a year-over-year basis.

Moreover, tariffs related to the U.S.-China trade war have affected growth. Notably, the United States is the largest semiconductor manufacturing country, with China being its biggest importer.

Further, Analog Devices’ gross margin contracted 140 basis points (bps) on a year-over-year basis in fourth-quarter fiscal 2019 due to a one-time inventory charge ($20 million) associated with a customer (probably Huawei) within its communications market. Although the company didn’t specify the name, it stated that the inventory write-off happened as the customer was added to the BIS entity restriction list.

Moreover, the Huawei ban is expected to negatively impact the Analog Devices business in China in fiscal 2020. The country accounted for 22% of total revenues in fiscal 2019.

Additionally, although the increasing adoption of advanced radio systems in 5G infrastructure is a positive, a slowdown in 4G adoption is a headwind for Analog Devices. Moreover, the company expects modest 5G demand to hurt revenues in the seasonally weak first quarter of fiscal 2020.

Declining Estimates a Worry

The Zacks Consensus Estimate for first-quarter fiscal 2020 revenues is pegged at $1.30 billion, suggesting a 15.6% decline from the figure reported in the year-ago quarter. Moreover, the consensus mark for fiscal 2020 revenues stands at $5.66 billion, down 5.5% year over year.

Moreover, earnings estimates have declined over the past 60 days. The Zacks Consensus Estimate for first-quarter fiscal 2020 earnings has declined 15.8% to $1.01 per share during the period. The consensus mark for fiscal 2020 earnings has decreased 10.3% to $4.78 per share over the same timeframe.

Our Picks

Though Analog Devices’ prospects may not appear appealing at the moment, there are some semiconductor stocks that offer good investment opportunities in 2020.

With the help of the Zacks Stock Screener, we pick four stocks that either carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, these stocks have outperformed Analog Devices in the past year.

One-Year Price Performance

Applied Materials AMAT sports a Zacks Rank #1. This Santa Clara, CA-based company is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules.

Applied Materials is driven by rising demand for semiconductor equipment and solid execution. It benefits from increased customer spending in foundry and logic on the back of rising need for specialty nodes in IoT, communications, automotive and sensor solutions. Also, strong momentum in conductor etches is aiding the company to gain traction in DRAM and NAND.

Applied Materials has a positive earnings surprise of 4.9%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2020 earnings has increased 14.6% to $3.77 per share over the past 60 days.

Chandler, AZ-based Microchip Technology MCHP is another Zacks Rank #1 stock. The company develops and manufactures microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks.

The company is benefiting from strength in the microcontroller business and well poised to gain from a strong demand for memory and analog and interface products. Moreover, it is well poised to capitalize on synergies from accretive Microsemi and Atmel acquisitions.

Microchip recently updated its third-quarter fiscal 2020 outlook owing to strong bookings since October 2019. Moreover, advancement in December bookings is driving backlog for the quarter ending March 2020.

The company has a positive earnings surprise of 3.6%, on average, in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2020 earnings increased 0.9% to $5.41 per share over the past 60 days.

Fort Collins, CO-based Advanced Energy Industries AEIS is one of the leading suppliers of power subsystems and process-control technologies to the semiconductor industry.

This Zacks Rank #1 stock is riding on its cost-optimization strategy and innovative product pipeline. We believe that growing design wins across hyperscale and enterprise customers and solid momentum across 5G platforms at infrastructure equipment suppliers will continue to drive the business. Additionally, rising investments in foundry/logic is a tailwind.

The company has a positive earnings surprise of 22.9%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2020 earnings increased 10.7% to $3.32 per share over the past 60 days.

Lowell, MA-based MACOM Technology Solutions MTSI is a provider of power analog semiconductor solutions for applications in optical, wireless and satellite networks.

MACOM is benefiting from its diverse product portfolio and strong exposure to multiple end markets. The company is riding on solid momentum across industrial and defense markets. Further, high-performance analog components such as TIAs, CDRs and drivers, which are required in 100G deployment, are strengthening the company’s presence in the data center market.

This Zacks Rank #2 stock has a positive earnings surprise of 34.4%, on average, in the trailing four quarters. The consensus mark for fiscal 2020 earnings has surged 47.1% to 25 cents per share over the past 60 days.


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