Chip Bulls See Second-Half Comeback After Shaky 2018 Start

In a year that’s seen cold water thrown on some of the hottest trades, it may pay to stick with semiconductors, according to Bloomberg.

Chip stocks, among the top performers in the past two years, had a volatile start to the year, as some market watchers had predicted. But analysts including MKM’s Ruben Roy see them moving higher in the second half, citing strong demand from data center, automotive and industrial customers and compelling valuations. “We continue to believe that attractively valued names, with upcoming growth catalysts“ are worth buying, Roy said. His top picks include Broadcom, Marvell and ON Semiconductor.

The Philadelphia Semiconductor Index has erased double-digit percentage gains twice this year as investors try to make sense of conflicting trends including U.S.-China trade tensions, continued strength in data-center demand and lackluster smartphone sales. The gauge is up 9 percent year-to-date, thanks to big increases from companies like Micron and Nvidia. The S&P 500 Information Technology Index, aided by companies such as Twitter and Adobe, is up 14 percent.

A forecast boost from Intel last month and continued strength in memory pricing should help fuel a 15 percent increase in revenue to $476 billion for the group in 2018, up from previous expectations for a 12 percent gain, Morgan Stanley analysts Joseph Moore and Craig Hettenbach said in a note last week. Selectivity is increasingly important and companies with “unique value or growth drivers“ such as Nvidia, Broadcom, Analog Devices and Xilinx will fare better, Moore and Hettenbach said.

Nvidia, up 30 percent this year, has been aided by a continued processor-buying binge by data-center owners. The company’s data-center revenue rose 71 percent to $701 million in the first quarter. Memory maker Micron, which announced a $10 billion share repurchase plan in May, is benefiting from similar demand trends and has gained 35 percent. Not all indicators are flashing bullish signs. Benchmark analyst Gary Mobley last month said he’s concerned about high levels of electronic component inventory “at most points in the supply chain.“