Semiconductor Stocks Forecast 2016: More Mergers, Slower Growth

The semiconductor stocks forecast for 2016 is going to sound familiar to anyone who follows the industry closely.

The wave of mergers and acquisitions (M&A) that started more than a year ago will continue in 2016. And sales growth in most, though not all, chip segments will slow.

That could mean more disappointing returns in the short term. Three years of steadily rising returns for semiconductor stocks ended in 2015, with the Philadelphia Semiconductor Index slipping 3.39% for the year.

And with the markets in turmoil, 2016 has started out with more losses. The index is off 13.44% so far.

According to the World Semiconductor Trade Statistics (WSTS), the silicon chip market was nearly flat in 2015, with growth of just 0.2% to $336 billion.

But WSTS also sees a reversal over the next two years, with semiconductor market growth of 1.4% this year and 3.1% in 2017. Segments like automotive tech and the "Internet of Things" - the ability of devices to interact with each other wirelessly -- are expected to drive this growth.

Regarding mergers among the chipmaker stocks, it seems at least one deal is always swirling.

Consolidation Far from Over for Semiconductor Stocks

Right now, Atmel Corp. (Nasdaq: ATML) has two suitors, Dialog Semiconductor Plc. (OTCMKTS: DLGNF) and Microchip Technology Inc. (Nasdaq: MCHP).

Atmel prefers Microchip's $3.42 billion offer pending a counterproposal from Dialog, which is not expected.

Last year, there were 23 M&A deals in the chip sector worth $119 billion total. In 2016, expect the merger mania to cool off a bit.

"We have been at a pace of about two deals a month," Mark Edelstone, managing director at Morgan Stanley Investment Banking, told MarketWatch. "I think things will slow down from that."

A maturing industry in need of some consolidation and cheap debt have fueled the deal-making.

"You will see the companies that deliver value be in a stronger position to command that value," Edelstone said. "This has been hard to do because you had too many competitors going after the same sockets, and that has been counterproductive."

The trend of consolidation is expected to reduce the total number of semiconductor companies by another 25% to 30%. That, combined with growth in demand driven by the explosion of the Internet of Things as well as demand for automotive chips, will help boost the earnings of most semiconductor stocks in 2016 and 2017.

Plus, all the M&A activity will reward those who own the acquisition targets.

Here are the semiconductor stocks that will benefit the most from these trends in 2016...

The Best Semiconductor Stocks for 2016

First, let's take a look at the semiconductor stocks in line to benefit most from the growing computerization of the automobile, exemplified by trends such as self-driving cars. Through 2020, research firm IC Insights expects the automotive segment to lead among semiconductors with a compound annual growth rate (CAGR) of 6.7%.

Try these semiconductor stocks to profit from this trend:

• STMicroelectronics NV (NYSE ADR: STM): STMicro is one of the four top chipmakers involved in the auto business, which provided STM with needed growth in 2015.
• Intel Corp. (Nasdaq: INTC): One of the reasons Intel bought Altera was for its auto chip technology. Intel is also aggressively pursuing business in the Internet of Things segment.
• NVIDIA Corp. (Nasdaq: NVDA): NVIDIA saw the opportunity in driverless cars early and has devoted substantial resources to it. In fact, in his presentation at the Consumer Electronics Show earlier this month, NVIDIA CEO Jen-Hsun Huang talked of nothing else. The company already sells the majority of its Tegra X1 chips to the auto industry.
• NXP Semiconductors NV (Nasdaq: NXPI): Driverless tech growth was a big reason NXP Semi bought Freescale Semi last year. With Freescale on board, NXP's auto-related sales will double to 40% of total revenue. It also makes NXP the No. 1 supplier of automotive-related chips in the world.

The Internet of Things - the second-fastest growing chip segment over the next several years -- should also start to bear fruit for these tech stocks in 2016. The top plays here are:

• Qualcomm Corp. (Nasdaq: QCOM): Qualcomm is one of the biggest names in the industry, but needs the growth IoT can provide now that the tablet and smartphone markets are maturing. In 2015 QCOM set up the AllSeen Alliance, an IoT consortium with more than 160 members committed to using Qualcomm's IoT chips. It's also why Qualcomm spent $2.5 billion to buy CSR, a company with expertise in Bluetooth and other wireless tech.
• Texas Instruments Inc. (NYSE: TXN): This veteran but often forgotten chipmaker is also making moves to exploit the IoT opportunity. Last fall TI came out with products aimed at IoT developers working with both Microsoft Corp.'s (Nasdaq: MSFT) and Amazon.com Inc.'s (Nasdaq: AMZN) cloud-based services. The company also is working on a way to amplify power from common everyday sources, such body movements, to power IoT devices.

These semiconductor stocks are prime acquisition targets:

• Xilinx Inc. (Nasdaq: XLNX): Xilinx is one of two chipmakers that specialize in Field Programmable Gate Arrays, or FPGAs. Processors with this tech can be reprogrammed as needed, making them more flexible and customizable than ordinary processors - ideal for the data centers at the heart of the Internet of Things. It's another big reason Intel bought Altera. Possible suitors include Qualcomm, International Business Machines Corp. (NYSE: IBM), and Advanced Micro Devices Inc. (Nasdaq: AMD).
• Maxim Integrated Products Inc. (Nasdaq: MXIM): Maxim focuses on analog semiconductors, which convert real-world things like sound and touch into electronic signals. That would make it a good fit for either Texas Instruments or Analog Devices Inc. (Nasdaq: ADI), both of which were discussing a deal this past fall. Earlier this month both companies said they had abandoned plans to buy Maxim, but M&A deals often have false starts before they get done.

Finally, the broad opportunity for semiconductor stocks over the next couple of years means that an exchange-traded fund (ETF) is also an excellent option.

The best choice here is the SPDR S&P Semiconductor ETF (NYSE Arca: XSD). Money Morning Defense & Tech Specialist Michael A. Robinson recommended it last fall.

"I believe SPDR S&P Semiconductor ETF is the single most cost-effective way to profit from the chip industry's M&A wave and the forces behind it," Robinson said.

 Follow me on Twitter @DavidGZeiler or like Money Morning on Facebook.

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David Zeiler

About the Author

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David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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