Here are Bank of America's top picks in a chip sector at a 'crucial juncture'

Published Tue, Jun 2 20206:48 AM EDT

(This story is for CNBC Pro subscribers only.) Despite escalating tensions between the U.S. and China, Bank of America said the semiconductor industry is at a "crucial juncture." The Wall Street firm remains bullish on the chip industry thanks to its secular and structural growth drivers even as the world's two largest economies face a rift over China's relationship with Hong Kong. The adoption of 5G remains a major headwind for the industry, Bank of America said. "Longer-term we believe semis will play a critical role in the new digital economy which is built on the processing, storing and networking abilities enabled by this very profitable, consolidated and disciplined sector," Bank of America research analyst Vivek Arya told clients. Shares of the iShares PHLX Semiconductor ETF have surged more than 40% in the past year despite a U.S.-China trade war and the deadly coronavirus pandemic. In the same period, the S & P 500 is up 11%. Typically, chip stocks are a good read on the relationship between the U.S. and China. An escalation in tensions could cause the sector to suffer. Bank of America said China's leverage in semis is "very limited," given it consumes 35% of the global chip supply, which is almost all based on technology owned by the U.S. and its western allies. "This is why we have not seen (and likely won't see) any major retaliation by China even as its tech champion (Huawei) continues to face more US restrictions," said Arya. The firm created a list of stocks for clients of its top picks in the chip sector. All of the listed stocks have upside to the firm's 12-month price target. Among large-cap semiconductor names, Nvidia is Bank of America's top pick. While demand for chips slumped during the first half of 2020 due to the global pandemic, certain companies benefited from surging compute requirements needed for work-from-home, e-commerce, video streaming, and gaming. Gaming is Nvidia's largest segment, allowing the company's stock to rally nearly 50% this year. Nvidia, Intel , AMD , Broadcom , Marvell and Inphi are Bank of America's top picks in the cloud space. All of these top computing vendors are ahead of major 2020 product cycles, the firm noted. "While China insourcing remains a key risk, all of these companies possess scarce/unique computing IP that is needed to power the next wave of high powered infrastructure, in our view," said Arya. "We also highlight China's past failures in developing alternative ecosystems." In the smartphone space, Skyworks , Analog Devices and Qorvo are set to benefit from the new 5G cycle. "We believe attractive 5G smartphone pricing and marketing promotions by leading global smartphone makers (Apple, Samsung, China) to be a key enabler of 5G smartphone adoption," said Arya. Due to tensions with China, the U.S. semi industry is potentially seeking $37 billion from the government for reshoring more U.S. semiconductor production. Bank of America believes sovereign manufacturing will become a bigger trend though over a matter of years rather than months. "This could be very positive for semicap equipment makers who benefit from redundant facilities and upfront capex on equipment and services," said Arya. Bank of America's favorite semi equipment makers are Applied Materials , KLA Corp . and Lam Research . — with reporting from CNBC's Michael Bloom

A gamer plays a video game with the Graphic card GeForce during the 'Paris Games Week in Paris, France.

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(This story is for CNBC Pro subscribers only.)

Despite escalating tensions between the U.S. and China, Bank of America said the semiconductor industry is at a "crucial juncture."

The Wall Street firm remains bullish on the chip industry thanks to its secular and structural growth drivers even as the world's two largest economies face a rift over China's relationship with Hong Kong. The adoption of 5G remains a major headwind for the industry, Bank of America said.

"Longer-term we believe semis will play a critical role in the new digital economy which is built on the processing, storing and networking abilities enabled by this very profitable, consolidated and disciplined sector," Bank of America research analyst Vivek Arya told clients.

Shares of the iShares PHLX Semiconductor ETF have surged more than 40% in the past year despite a U.S.-China trade war and the deadly coronavirus pandemic. In the same period, the S&P 500 is up 11%. Typically, chip stocks are a good read on the relationship between the U.S. and China. An escalation in tensions could cause the sector to suffer.

Bank of America said China's leverage in semis is "very limited," given it consumes 35% of the global chip supply, which is almost all based on technology owned by the U.S. and its western allies.

"This is why we have not seen (and likely won't see) any major retaliation by China even as its tech champion (Huawei) continues to face more US restrictions," said Arya.

The firm created a list of stocks for clients of its top picks in the chip sector. All of the listed stocks have upside to the firm's 12-month price target.