Chip stocks have set the market on fire in 2017, with the likes of NVIDIA (NASDAQ: NVDA), Micron Technology (NASDAQ: MU), and Skyworks Solutions (NASDAQ: SWKS) leading the charge with market-beating gains. These three stocks have beaten the PHLX Semiconductor Index hands down this year, thanks to impressive quarterly results that have exceeded Wall Street's expectations.
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But can these three industry stalwarts sustain their momentum in the second half of the year? Let's find out.
NVIDIA's business is set to get better
The first half of the year is traditionally a weak one for GPU (graphics processing unit) sales, with shipments gaining momentum from the third quarter onward. For instance, discrete GPU shipments fell over 19% year over year during the first quarter of 2017, according to estimates from Jon Peddie Research.
Furthermore, the sequential decline was far bigger, with shipments falling close to 30% quarter to quarter. However, NVIDIA has done well despite the seasonal weakness in the GPU market, with its first-quarter results blowing past estimates on the back of a 50% jump in gaming revenue.
NVIDIA's massive gaming bump was largely driven by the higher average selling prices and increased year-over-year shipments of its GPUs. As it turns out, analysts expect the GPU specialist's revenue to rise almost 37% year over year during the quarter that ends in July. This points toward a stronger financial performance in the second half of the year, when the GPU market picks up the pace, more so because gaming accounts for 53% of NVIDIA's total revenue.
What's more, NVIDIA will also get a shot in the arm thanks to an improving PC market scenario. PC sales actually increased slightly during the first quarter of the year, while they were expected to decline 1.8% as per IDC's estimates. Looking ahead, PC sales should ideally remain strong as users replace their older machines with new ones, setting the stage for stronger GPU shipments.
Gaming is one of the biggest drivers behind PC sales currently, with sales of gaming hardware crossing $30 billion in revenue last year. Now, high-end gaming systems account for 43% of hardware sales, so NVIDIA's average selling price should continue to remain strong. Concurrently, the gaming hardware market could grow at an annual pace of 6% for the next three years, paving the way for stronger GPU shipments that NVIDIA could take advantage of since it commands over 70% share of this space.
Skyworks investors should prepare for an Apple boom
Skyworks Solutions is best known for being an Apple supplier as it gets close to 40% of its revenue from Cupertino. Though the chipmaker has been trying to wean itself off of its reliance on the iPhone maker by boosting its relationships with Chinese smartphone manufacturers, Apple will definitely enhance its business in the second half of the year with its next iPhone.
Skyworks' dollar content had increased 10% to $6 in each unit of the current-generation iPhone. Pacific Crest Securities believes the chipmaker can once again boost its content in Apple's next flagship, which will have a positive bearing on Skyworks' top line since Cupertino is going to substantially boost iPhone builds.
Apple could make anywhere between 100 million to 110 million iPhones during the second half of 2017, while it had reportedly made 75 million units in the same period last year. Therefore, Skyworks' Apple-related revenue could jump 40% during the second half of the year even if it maintains its dollar content at current levels in the next iPhone.
Additionally, Skyworks isn't too expensive despite climbing close to 30% this year. Its price-to-earnings (P/E) ratio of 20 is equal to the company's 13-year median P/E ratio, which makes it a good bet as its earnings could grow close to 14% this year, according to Yahoo! Finance estimates.
Micron will benefit from a favorable end market
Memory chip specialist Micron Technology delivered yet another impressive quarterly result late in June, receiving at least 10 price target hikes by analysts. Micron trumped estimates by a huge margin and also issued positive guidance, expecting an 83% year-over-year increase in revenue during the current quarter.
Investors shouldn't be surprised by Micron's rampant growth as it has terrific catalysts in the form of higher memory pricing power and increased demand by smartphone makers for memory chips. For instance, the memory content in each smartphone could jump 33% this year, so it is not surprising to see why the company is upbeat about new smartphone introductions this fall.
In all, Micron forecasts DRAM supply growth of 15% to 20% for 2017 will be lower than the projected demand growth, which will support better pricing. On the other hand, Micron's transition toward more advanced DRAM and NAND manufacturing nodes could help it achieve 20%-30% cost reduction going forward, paving the way for a stronger bottom-line performance.
Analyst estimates suggest that Micron's earnings per share could jump from just $0.06 per share in the previous fiscal year to $4.65 per share in the current one. Therefore, investors can expect greater upside potential from Micron thanks to its increased earnings power on the back of favorable memory market conditions and projected cost reductions.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Nvidia, and Skyworks Solutions. The Motley Fool has the following options: short November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool has a disclosure policy.