While semiconductor stocks are facing headwinds like rising chip inventories and slowing demand in certain segments, Wall Street analysts still see some bright spots.
Companies involved in semiconductor design and those that make chips for automakers are best positioned amid the current market turmoil, they say.
Chip industry inventories are near historic highs as pandemic-related supply constraints ease, Deutsche Bank analyst Ross Seymore said in a note to clients on Sunday.
The increase in "days inventory outstanding" has sparked investor concerns about potential inventory write-downs amid weakening demand, Seymore said. Days inventory outstanding, or DIO, is the average number of days it takes for inventory to be sold.
Last week, Nvidia took a $1.32 billion inventory write-down after gaming chip sales stalled.
Broadcom, ON Semiconductor Called Top Picks
The Philadelphia semiconductor index, or SOX, will have a tough time outperforming the broader market until supply-demand volatility subsidies, Seymore said. The SOX includes the 30 largest semiconductor stocks traded in the U.S.
Investors in semiconductor stocks should focus on names that offer a combination of conservative fundamental expectations, reasonable valuations and company-specific catalysts, he said.
Seymore said his favorite names among semiconductor stocks are Broadcom, Marvell Technology, MaxLinear, NXP Semiconductors, ON Semiconductor and Qualcomm. He has buy ratings on those six semiconductor stocks.
Semiconductor Stocks On IBD Tech Leaders List
On Monday, Wells Fargo analyst Gary Mobley said he prefers semiconductor stocks that have secular growth catalysts independent of the current chip cycle.
In a note to clients, Mobley said he is most bullish about two companies that provide tools for designing semiconductors. They are Cadence Design Systems and Synopsys. Cadence is on the IBD 50 list of top-performing growth stocks.
He also likes chip companies that have an outsize portion of revenue tied to the automotive market. Those semiconductor stocks include Allegro MicroSystems, Ambarella, NXP, ON Semiconductor and Wolfspeed. ON Semiconductor, also known as Onsemi, is on the IBD 50 list.
The automotive and industrial end markets for chips appear to be holding strong, Mobley said. Meanwhile, semiconductor stocks exposed to personal computers and smartphones are seeing declining demand.
IBD's Tech Leaders list includes several of the semiconductor stocks named by Seymore and Mobley. They include Allegro MicroSystems, Broadcom, Cadence, Onsemi, Qualcomm and Synopsys.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.