Analyst explains how to trade chip stocks right now — and gives one upside of nearly 100%

Published Thu, Jul 14 20228:42 PM EDT

After years of market-beating returns, investment bank KeyBanc believes a correction is now looming in the semiconductor sector. "The second quarter was a challenging quarter full of cross-currents impacted by the China COVID lockdowns and weakening end demand across all consumer end markets, which was offset by robust auto and industrial trends," KeyBanc's analysts, led by John Vinh, said in an industry update on Jul. 12. "From a cyclical perspective, increasing inventories and easing lead times indicate a correction is looming in the second half." Nevertheless, the bank remains "constructive" on the sector, which it said is trading at or near trough valuations. The bank also expects a soft landing for the sector, given the resilience of secular trends such as 5G, electrification and artificial intelligence. Read more The chip sector looks gloomy. But JPMorgan says these stocks will be a bright spot in a recession Chip stocks are in trouble. But analysts are giving some serious upside — naming one with over 70% This fund manager oversees $10 billion. Here's where he's investing as inflation stays high Stock picks Delaware-based Marvell Technology is the only chip stock that KeyBanc says has an improved near-term outlook. "We believe Marvell continues to benefit from strong cloud demand. Additionally, we believe the qualification and ramp of Marvell networking switches at Dell , Meta /Facebook, Google , and Microsoft Azure is moderately positive," Vinh said. The bank has ascribed a price target of $90 on the stock, which closed at around $46 on Jul. 13. This represents a potential upside of 95.7%. KeyBanc said Analog Devices , ON Semiconductor and NXP Semiconductors are among the chip stocks with the highest exposure to the autos and industrials end markets and are "best positioned" to benefit from continued strength and strong pricing in this space. All are rated overweight by the bank. The bank also compiled a list of chip stocks where its near-term outlook has now turned negative. One such stock is Nvidia . The sector could face near-term headwinds from slowing sales of graphics processing units (GPU) in the gaming space, as well as a slowdown in crypto mining, according to Vinh. But he retains a "bullish" long-term view on the company, given the growth in AI and monetization of its software business. KeyBanc remains overweight on the stock, but lowered its price target to $230 from $250 previously. Shares in Nvidia closed at around $152 on Wednesday, representing a potential upside of 51.3%. Advanced Micro Devices is another stock that KeyBanc has turned negative on in the near-term, citing excess gaming GPU inventory and slowing PC demand. On a longer-term basis, the bank continues to see secular growth for the company in the cloud segment, however, and believes it will continue to gain more market share over the next two years. KeyBanc has lowered its price target for AMD to $130, down from $150 previously. The stock closed at around $78 on Wednesday — an implied upside of 66.7%. Read more The chip sector looks gloomy. But JPMorgan says these stocks will be a bright spot in a recession It comes as the once red-hot sector has taken a drubbing amid concerns of an inventory glut and slowing sales of consumer electronics. The iShares Semiconductor ETF is down around 35% year-to-date, significantly underperforming the major averages. But the longer-term outlook for the sector remains relatively bright given chips' wide variety of applications — from PCs and smartphones, to household appliances and electric vehicles. They also play an essential role in the development of AI and quantum technologies.