Broadcom, Nvidia, Qualcomm among Mizuho's top chip picks for '23
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The semiconductor industry had an annus horribilis in 2022, but investment firm Mizuho Securities has listed Broadcom (NASDAQ:AVGO), Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) as some of its top picks in the space for 2023, even if this year isn't likely to see a massive rebound in business.
Analyst Vijay Rakesh noted that the inventory correction that occurred in 2022 is likely to continue this year. But, at least in the first-half of the year, that correction could be "softer" than a year ago. Additionally, there is the expectation that the latter part of the year could see a rebound in certain areas, including gaming and data centers, as well as wafer fab equipment and smartphones.
Rakesh said in a research note that over the last 20 years, the semiconductor industry only declined in consecutive years in 2001 and 2001, and from 2006 to 2008, while recovery years were up by an average of 40%. Rakesh added that risks to the sector are likely macro-related due to higher interest rates and certain areas of supply and demand imbalance.
Delving deeper, Rakesh sees opportunities for investors in wafer fab equipment, data center and GPUs, electric vehicles and advanced driving assistance systems and "select" areas of 5G and handsets. Conversely, the Rakesh is cautious on the broader analog and memory markets, at least in the near-term.
For wafer fab equipment - of which Rakesh favors companies like Applied Materials (AMAT) and Lam Research (LRCX) - estimates are for spending to be down 20% year-over-year, but strong backlogs, particularly at the aforementioned companies, should prop up industry sales.
Additionally, an additional tailwind could come from Taiwan Semiconductor's (TSM) recent better-than-expected announcement that its 2023 spending plans would be between $32B and $36B. Looking ahead, growth should resume next year, with 2024 spending estimated to rise 7%, due in part to the U.S.'s $52B CHIPS Act, which became law last year.
Rakesh added that Nvidia (NVDA) and AMD (AMD) are poised to benefit from a rebound in gaming and continued strength in the gaming sector, especially in the second-half of the year.
According to Rakesh, the launch of new data center and GPU products could add to industry growth in the second half of this year. Rakesh also said that GPU inventories could reach a bottom in the first of the year before new product launches help turn the sector around.
The handset business was bumpy in 2022, with the closure of China for much of the year and Apple's (AAPL) dealing with iPhone 14 supply issues as a result.
While it's possible the challenges could remain in the first part of the year, it's likely that a moderation in the decline could start and and any "modest pickup" in demand for smartphones could drive growth for companies tied to radio frequency chips and processors, such as Qualcomm (QCOM) or Skyworks Solutions (SWKS).
"With China ending its zero-Covid policy, we see demand returning to China and potential for some revenge' spending due to flagship phone launches," Rakesh added.
Micron (MU) is the largest publicly traded company in the memory market and though the company has already said it would cut spending plans multiple times, there is the potential that weakness in the memory market could persist into the second half of the year because of inventory and pricing issues.
However, Rakesh added the second-half of the year could see a recovery and while there may be "muted" demand, gross margins for certain companies could start to recover by the first-half of 2024.
Lastly, the supply chain for the analog market could see hiccups this year due to worries about the automotive and industrial markets, but still experience strong growth by 2025, potentially benefiting companies such as ON Semiconductor (ON), Allegro MicroSystems (ALGM). Conversely, incumbents in analog, such as Texas Instruments (TXN) and NXP Semiconductors (NXPI), will likely have to deal with additional fab supply from China and pushbacks on price from auto companies.
In December, UBS said it was bullish on chips going into 2023, picking Nvidia (NVDA) as one of its top picks.