After a 14% rise in the Philadelphia Semiconductor Index (SOX) this year, ahead of the S&P 500‘s 10% rise, Needham & Co.’s Rajvindra Gill recommends staying the course with the “secular” chip stocks, rather than switching to “cyclical” names that will benefit from inventory restocking. The cyclicals’ shares are already pricing in the benefit they may see from restocking, offering little upside, he thinks.
To wit, Gill continues to recommend shares of Spansion (CODE), OmniVision Technologies (OVTI), Silicon Image (SIMG), and Silicon Motion (SIMO) as companies that “will each meet/beat our near-term expectations,” in his view.
“We believe the “inventory restocking trade” and phase one of the recovery in the semiconductor cycle are well-priced into share prices, as evident in the 30% rise in the SOX off the October bottom,” writes Gill.
Gill is generally concerned Q2 results for semis are at risk from “order rates trending up, but at a lower rate than Street expectations.” He’s also concerned about possibly unrealistic Street expectations for a 14% “snap back” in semi revenue in the second half of this year, not to mention an “uncertain demand environment,” with some weakness in networking chips, consumer electronics goods, PCs, and “softness” in smartphone sales aside from those of Apple (AAPL) and Samsung Electronics (005930KS).
Among his picks, Gill likes Spansion’s “gross margin recovery plan”; he likes OmniVision’s role in Apple’s new iPad; he thinks Silicon Image could benefit from “recent positive data points” at Samsung, at Hong Kong’s ZTE (0763HK), and China’s Huawei (2502CN), and he’s encouraged by design wins for SIMG’s “mobile high-definition link,” or MHL, product for cell phone video; and Silicon Motion may benefit from a rebound in flash memory chips.
The SOX today is up almost 9 points, or 2%, at 418.41.