ON Semiconductor, Microchip Technology are Piper Sandler’s ‘favorite analog names’

Piper Sandler said that ON Semiconductor (NASDAQ:ON) and Microchip Technology (NASDAQ:MCHP) are its favorite analog names, while previewing the upcoming third quarter results of semiconductor companies.

The firm noted that Advanced Micro Devices (AMD) remains its top large-cap pick.

Analysts led by Harsh Kumar said they view AI compute driving the incremental growth among semiconductor end markets, while analog and mobile-oriented names lag fundamentally. In terms of stocks, they continue to see most upside for the compute names while remaining neutral on most analog and radio frequency, or RF, names.

In terms of the large end markets within analog, the analysts think that the recovery within automotive and industrial has been stunted a bit relative to prior expectations coming into the second half of 2024.

The analysts added that after a promising start seen in June time frame, the general recovery seems to be stalling at this time. The analysts believe that there will be a small recovery in automotive revenues into the back half of the year, mainly driven by lower interest rates proliferating into the market and China.

For industrial, larger projects remain elusive, according to Piper Sandler, as only pockets of select activities seem to be driving the market. Overall, as the macro slowly improves driven by rate cut in the next three to four months, the analysts expect slight pickups rather than robust growth in each of these end markets through the year-end.

ON Semiconductor and Microchip Technology:

The analysts said their favorite analog names are ON and MCHP, and they see both best positioned to capitalize on this stage of the recovery cycle with the analog end market.

Of the remaining names within the group — Analog Devices (ADI), NXP Semiconductors (NXPI), and MACOM Technology Solutions (MTSI) — the analysts remain mixed due to the uncertain nature of the speed of the recovery. They noted that Texas Instruments (TXN) cited strength in China, which they see as also benefiting Microchip Technology and ON Semiconductor.

Microchip Technology currently generates 18% of revenue from China, and ON Semiconductor’s exposure is at about 50% for the APAC region ex-Japan.

Kumar and his team noted that they remain neutral on RF market as smartphone demand is slow but steady.

The analysts said that on handsets, they are fundamentally neutral on the end market. They think calls for handset growth of 3% to 4% is not inspiring at this time and is considered into expectations. In the near-term, upside potential for specific market players will be driven by share shifts in their view.

In addition, Apple’s (AAPL) AI product Apple Intelligence is not driving super cycle during the holiday period, the analysts noted. They do not believe that Apple Intelligence will drive a handset super-cycle in 2024 and thus the upside potential for RF names, covered by them, will be limited due to the launch of the latest iPhone lineup.

The analysts added that their expectations are for largely seasonal to slightly below seasonal upturns in demand over this period which they note is relatively consistent with commentary from management teams.

AI compute end market is still driving incremental growth for Semis. The analysts said they continue to favor each of the four largest compute names in their coverage, which are Advanced Micro Devices (AMD), Nvidia (NVDA), Broadcom (AVGO) and Micron Technology (MU).