Earnings season presents a much-needed opportunity to separate the winners from the losers in the semiconductor sector, an industry that has attracted plenty of buzz this year.
That is according to analysts at Citi Research, who made the case for stocks including Microchip Technology and Texas Instruments in a note Friday. The report came after weeks of meetings with Citi clients to gauge near-term investor sentiment.
The Citi team anticipates Intel could face a short squeeze during earnings, driving the price higher on the heels of the second-quarter results next week. A squeeze occurs when the price of a heavily shorted stock rises suddenly, forcing short sellers to buy back shares to cover their positions and causing the price to rise even higher.
The analysts said Intel “remains the most popular short among investors we met.” At the end of June, Intel’s short interest was 2.97% as a percentage of its float. While that isn’t considered a high level at face value, it is higher than Micron Technology at 2.52% and Texas Instruments at 1.95%.
“Intel remains the most popular short but we believe the stock could squeeze higher during earnings,” the analysts said. They say earnings could come in stronger than expected, driven by lower capital and operating expenses, “and likely upside from the PC end market,” which accounts for roughly 60% of sales.
Citi noted that its second-quarter estimates for earnings are above the Wall Street consensus. The firm rates Intel at Neutral with a $24 price target.
Conversely, ON Semiconductor appears to be a popular stock for investors to own, based on conversations with Citi clients over the past few weeks. “It appears that investors have been buying ON Semi given an upturn in analog and expectations of upside,” the analysts wrote.
Citi believes the company’s silicon carbide business, which represents around 13% of sales, as well as its low-end business in China, which centers on less complicated and powerful chips, “are still at risk.” The firm expects gross margin to be flat sequentially in the third quarter at 38%.
“As a result, we believe the stock could trade lower after earnings,” the Citi team wrote. The analysts rate ON Semi at Neutral with a $60 price target, suggesting barely any gain from the current price. Shares were up 0.4% at $59.64 on Friday.
The bank is cautiously upbeat on Advanced Micro Devices, predicting the stock will “trade up before the print driven by AI strength,” but also saying “We are concerned buyside expectations may be too high on AMD but nobody will know until August when AMD reports.”
Citi believes Micron shares could be weak for a while, both because prices of DRAM chips are flattening and because of concern about an oversupply of high bandwidth memory. It rates AMD at Neutral and Micron at Buy.
Microchip Technology and Texas Instruments are shaping up to be two underappreciated winners, Citi argued. It rates both stocks at Buy, with price targets of $90 and $260, respectively.
And while ON Semi is now a popular stock, Microchip doesn’t appear to have caught on among investors. “We expect the most upside from MCHP and TXN, and expect both stocks to trade higher,” the analysts contended.
Microchip, in particular, is Citi’s top pick. It may not attract a lot of buyers now, but the analysts believe sentiment will shift after earnings. Microchip has “the most upside potential to consensus estimates” among all the semiconductor stocks the bank covers.
