Morgan Stanley On 'What's Moving Semi Stocks'

June 29, 2015

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In a report published Monday, Morgan Stanley analyst Joseph Moore analyzed what was moving the semiconductor stocks.

Investor sentiment on Avago Technologies Ltd (NASDAQ: AVGO)

Morgan Stanley has an Overweight rating on Avago. “We are surprised that AVGO has not traded better, although recent consolidation should set the stage for the next leg higher in the stock,” analyst Joseph Moore said.

Avago’s stock touched a record high of $150 on June 1, following which it slid 10 percent, versus a 7 percent decline in the SOX index. Moore believes that this offers “an excellent opportunity to build a position in the stock.”

Investors seem to be focusing on the deal with Broadcom Corporation (NASDAQ: BRCM). Moore pointed out, however, that Avago had continued to execute solidly in its core business, having recorded a 6 percent EPS beat in the April quarter, while several other semiconductor companies were struggling.

“We expect solid fundamentals and an upward bias to estimates for AVGO in 2H on seasonal strength/upside in wireless and upside in ELX accretion, which should help bridge the gap to the closing of BRCM,” the report added.

The macro environment in China

This remains mixed. In the report Morgan Stanley noted, “Fixed Asset Investment for May came in slightly below expectations. And, while there was a slight tick up in Industrial Production, on an absolute level remains significantly below 2014.”

Morgan Stanley's proprietary indicator MS-CHEX continues to indicate sluggish growth conditions in the region, with merely 0.3 percent y/y growth in April and May remaining flat.

New Fiji graphics chip by Advanced Micro Devices, Inc. (NASDAQ: AMD)

Moore has an Underweight rating on Advanced Micro Devices. The new graphics chip, formerly known as Fiji, is now called Fury X. This shipped to retail last week, and is “an important product” for AMD.

In the report Morgan Stanley noted that the benchmark results were “mixed.” There were areas where “the HBM offers very strong performance – particularly rendering in 4k – but at lower resolutions, the comparable Maxwell product performed better. AMD lacks some key features, such as DVI and HDMI 2 support, that may be important for some users.”

Moore believes that NVIDIA Corporation (NASDAQ: NVDA) would be able to maintain its strong share in the high end space. “The real test will come next year, when we see both companies' new architectures which finally move forward from 28 nm to FINFET architectures from TSMC, Samsung, and Global Foundries.”