Barron's had a good article on the semiconductor sector in this weekend's version of the widely followed industry publication. Barron's is very positive on the space as revenue is steady and the need for investment in the sector is falling as we are on the back end of an upgrade cycle.
This is pumping up margins and free cash flow across the sector. In fact, according to RBC Capital Markets the chip industry will lead the market for free cash flow growth annually over the next five years with an estimated 11% annual growth over that time period.
The article highlights seven attractive chip stocks and provides a brief profile of four. Here are the two I find the most compelling at current levels.
Marvel Technology (NASDAQ:MRVL) is a leading fabless semiconductor company. Marvell ships over one billion chips a year. The company has expertise in microprocessor architecture and digital signal processing which drives multiple platforms including high volume storage solutions.
Wall Street currently estimates that the company should have impressive year-over-year free cash flow growth of ~70% in 2014. Marvell should generate revenue growth in the low teens year-over-year in FY2014. The shares go for ~13.5x forward earnings, a twenty percent discount to the overall market multiple of ~16x forward earnings.
The shares are cheaper if an investor considers the company's fortress balance sheet. Marvell has over $2B in net cash on the books, which is better than 25% of the stock's current market capitalization. Backing net cash out of the equation, MRVL goes for 10x forward earnings and it also pays a 1.6% dividend yield. The company beat top and bottom line expectations when it reported quarterly earnings last week and offered a strong outlook as well.
Nvidia (NASDAQ:NVDA) is a pioneer in visual computing and offers high speed processors for smartphones, tablets, gaming devices, notebooks, PCs, high end workstations and other computer devices. The article in Barron's notes that the company has returned 70% of its free cash flow over the past four years to shareholders via dividends and buybacks.
The company is another chip play that has a fortress balance sheet with some ~$3B in net cash on the books which equates to more than 25% of the equity's market capitalization. The shares yield 1.8% but I would expect that to go up nicely over the next twelve months as the current Wall Street consensus calls for the company to more than double free cash flow in 2014.
Nvidia should see a ten percent year-over-year revenue increase this year. Insiders have a significant stake in the firm and have not been selling despite a nice recent bump in the stock price which is always comforting. Consensus earnings estimates for both FY2014 and FY2015 have also jumped over the past two months. The company also beat on the top and the bottom line consensus when it reported results earlier this month.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MRVL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.