Semiconductor Stocks: Prepare for Mixed 3Q Results/Guidance Says Goldman Sachs and Upgrades Broadcom (AVGO) to Buy and Downgrades Western Digital (WDC) to Neutral

October 15, 2021 8:49 AM EDT
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Price: $553.57 -0.92%

Rating Summary:
    41 Buy, 3 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 0 | Down: 2 | New: 5
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Goldman Sachs analyst Toshiya Hari has previewed the 3Q earnings season as far as semiconductor stocks are concerned.

Overall, the analyst is expecting to see “more mixed” quarter results compared to 2Q due to: 1) supply chain bottlenecks, 2) demand dynamics, and 3) cost inflation.

“We believe investor sentiment on the group is muted, to say the least. That said, and while strong results and guidance could drive a near-term positive reversion in stocks similar to last quarter, with the SOX still trading at a 7% premium to the S&P500 and IC units excluding memory tracking 15% above what we estimate to be the long-term trend-line, we recommend investors to be very selective and to buy/own stocks that have idiosyncratic earnings tailwinds that could at least partially offset any industry-level weakness,” Hari said in a client note.

The preview also yielded two rating changes - Broadcom (NASDAQ: AVGO) upgraded to Buy and Western Digital (NASDAQ: WDC) to Neutral. A new price target on AVGO is $589.00 per share from the prior $527.00.

“Given the increasingly uncertain consumer demand and cost environment, we believe Broadcom’s 1) outsized exposure to cloud/enterprise/telecom spending; 2) pricing power (i.e. industry-leading gross margins) supported by its scale advantage and robust competitive position; and 3) FCF generation (i.e. FY22E FCF yield of 7.6%) and capital return profile, will drive a relative re-rating in the stock. While AVGO has slightly outperformed recently (+3% vs. the median stock in our universe -1% over the past 3 months), we expect the stock still has room to run and note it has still underperformed the median stock in our coverage over the last twelve months (+31% vs. +39% respectively),” Hari wrote on AVGO.

On the other hand, WDC is downgraded amid expectations that cyclical pressures in the NAND business will hurt the company. The price target goes to $62.00 from $91.00 as Hari acknowledged that the March call to upgrade WDC was the wrong one.

“Weakness in PCs and concerns regarding the outlook for NAND ASPs have driven underperformance in the stock — and now await a better entry point from the sidelines. With our view on 1) management, 2) the company’s ability to execute on their technology/product roadmap, and 3) the HDD industry’s cross-cycle margin profile, still positive, we would consider turning more constructive on the stock when we begin to see early signs of improving NAND supply/demand,” the analyst concluded.

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