The broader semiconductor industry is expected to continue its outperformance for the next couple of quarters, but stocks tied to memory and storage could be the real stars of 2022.
Semiconductor names like AMD (NASDAQ:AMD), Nvidia (NASDAQ:NVDA) and Marvell Technology (NASDAQ:MRVL) have outperformed the broader indices, but that they could be surpassed by companies tied memory and specifically, DRAM storage.
Bank of America analyst Vivek Arya notes that the fourth and first-quarters of any calendar years have "consistently" been the two best quarters to own semiconductors, outperforming the broader Semiconductor Index (NASDAQ:SOXX) by at least 3.5%. That is likely to continue into 2022, as the industry benefits from a shortage - in turn, supporting pricing - and continued advancements in artificial intelligence and cloud computing.
While companies like Nvidia (NVDA), AMD (AMD) and Marvell (MRVL) are likely to benefit in the long term, the drastic short-term outperformance could be coming to an end.
Arya said that despite the Semiconductor Index (NASDAQ:SOX) being up 40% this year, versus a 24% gain by the S&P 500 (SP500), and even with seasonal momentum, there's a sense that investors are still cautious about getting into the chip sector,
"Their biggest concern in our view is the risk of peaking demand, and deceleration in pricing [and] growth on tougher [year-over-year] calendar year 2022 compares and potential overinvestment in industry capacity," Arya said in a research note.
Arya lists Nvidia (NVDA), AMD (AMD) and Marvell (MRVL) as his three favorite stocks, with price targets of $375, $175 and $80, respectively. Other companies, such as ON Semiconductor (NASDAQ:ON), KLA Corp. (NASDAQ:KLAC), Teradyne (NASDAQ:TER), GlobalFoundries (NASDAQ:GFS) and Applied Materials (NASDAQ:AMAT) are also viewed favorably.
The analyst notes that semiconductor stocks should benefit from a relative underweighting in active portfolios, having declined to a nine-month low in September 2021. Stocks, such as Nvidia (NVDA) may be widely owned by individual investors, but active fund managers have kept their positions in the company to merely market-weight.
Other themes, such as electric vehicles and the burgeoning metaverse will keep semiconductors in the eyes of investors as "arms-dealers," but it's possible the semiconductor index peaks ahead of the sales peak, which could happen in the next half of 2022.
Negative events such as slowing sales growth - expected to be between 8% and 10% next year - rising labor costs and whether the industry can raise prices and pass those on to customers are also concerns among investors.
To keep the party going, Arya adds that there could be benefits from moving manufacturing to the U.S. and if the federal government were to pass the U.S. Chips Act, currently being debated in the House of Representatives.
Citigroup analyst Peter Lee said that memory stocks should outperform the broader semiconductor industry next year, due to a possible memory supply shortage, as the U.S. government is blocking DRAM equipment makers from exporting certain tools to China, hurting DRAM supply coming out of the world's most populous country.
As such, Citigroup reiterated its buy rating on Samsung (OTC:SSNLF) and Micron (NASDAQ:MU) as the research firm believes the memory market "will exit from the short-term downturn" it will likely deal with between the fourth of 2021 and the second quarter of 2022, before recovering through the rest of the year.
Concerning the Omicron COVID-19 variant, it's likely that demand for memory will "remain resilient" as it has during past resurgences of the virus, but some mobile demand could be "dented," Lee acknowledged.
Nvidia (NVDA) shares outperformed in November and in the short-term, are likely to continue outperforming, as the trend is seen as an investor's friend.