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  • Are MANGO stocks set to be the new leaders on Wall Street?

    We take a closer look at the latest Wall Street acronym hitting the headlines and two MANGO stocks that could have the potential to thrive.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    MANGO – a play on the popular FAANG acronym used to describe a group of mega-cap US tech stocks – is the latest Wall Street acronym hitting the headlines.

    MANGO focusses on the semiconductor sector, and includes Marvell Technology, Broadcom (whose stock market code starts with an ‘A’), Advanced Micro Devices and Analog Devices, Nvidia, Global Foundries, and On Semi.

    Semiconductors (aka chips) have made headlines as a range of products that rely on these chips, from new cars to washing machines, have seen production delays. Demand for chips soared over the pandemic as consumers with cash in hand and little to do splashed out on new technology, and supply wasn’t able to keep pace.

    Despite not keeping up with demand, semiconductor sales hit record highs last year and show no signs of slowing. Sales in January increased by more than 20% making it the tenth consecutive month where sales were up over 20%. That’s helped boost the value of the industry as a whole.

    Refinitiv global semiconductor index

    Past performance isn’t a guide to the future. Source: Refinitiv, 01/04/2022.

    Semi stocks have historically been cyclical, which means their performance has ebbed and flowed with the health of the wider economy. We think there’s an argument this could be shifting though. As technologies become integrated into every walk of life, chips are at the heart of that. Demand could become more consistent in the modern world than ever before.

    With that in mind, here’s a look at a couple of MANGO stocks that have potential to thrive in a chip-driven world.

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    Gaming and beyond

    Nvidia’s a semiconductor powerhouse, with a market cap of more than $700bn. From inventing the graphics processing unit in 1999 – a key piece of hardware that allowed modern day gaming to exist – the group’s products are now integrated into computer systems all over the world.

    While it’s now well beyond its gaming roots, gaming is still the group’s largest business segment by sales. And it’s an area that’s enjoyed a golden era as gaming’s become the world’s largest entertainment industry. Nvidia’s been at the heart of that and enjoyed the spoils that have come with it. Quarterly gaming revenues increased over 150% in the last two years alone.

    Nvidia’s leveraged its position in the graphics processing units (GPU) market to create products and services tailored to all manner of gamers. SHIELD devices allow users to stream games to any TV they have, without needing an expensive PC or console. GeForce Now is a play in the cloud universe allowing gamers to access Nvidia’s powerful gaming hardware from anywhere in the world.

    Though, Nvidia is far more than just a GPU provider. The power of its chips means it’s been able to branch out into other areas in the computing world. Growth in the Data Center division has been top of the pile over the last couple of years, and that’s saying something when you consider how well Gaming’s been doing.

    Revenue per segment ($millions)

    Source: Nvidia 2022 financials.

    This is the group’s computing platform, where it helps businesses handle computer-intensive workloads. The success of the segment so far, is largely a factor of its broad, diverse, and expanding end markets. It caters to businesses involved in artificial intelligence and machine learning, to financial analysis and optimising business processes like oil exploration.

    Outsourcing all its manufacturing, Nvidia’s able to avoid lots of the costs and risks associated with owning and operating large facilities. The downside of that model is the group doesn’t have as much control over its supply chains as it could. This brings its own risks, but with lower fixed costs come gross margins just shy of 70% and free cash flow of over $8bn.

    That feeds into a balance sheet stocked full of cash and a business that it’s hard not to be impressed by. But you’ll have to pay a pretty penny to join the party with the group trading on a price to earnings ratio of 47.5, well above its long-term average. That’s high enough that any unwelcome surprises won’t go down well.

    There’s also always the possibility that this is as good as it gets for both chips and gaming. That adds an element of risk investors will need to consider carefully.

    SEE THE NVIDIA SHARE PRICE, CHARTS AND OUR LATEST VIEW

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    Broad chip exposure

    Broadcom offers a slightly different avenue into the semi space than some of its peers. With a focus on less jazzy end markets that make our everyday lives tick over, like mobile phones and broadband. The diversified end markets mean the group isn’t as tied to the success of any one industry as some of its peers, which is a positive.

    Further diversification has also come over the last few years, with the group expanding away from chips. Big acquisitions like the $10.7bn to take control of cyber security business Symantec have pushed the group into the Infrastructure Software space.

    Revenue by segment ($millions)

    Source: Broadcom annual report (fiscal year 2021).

    Those acquisitions have helped support steady margin growth since 2017 – gross margins currently sit just shy of 75%. Expanding into new areas doesn’t often work and comes with a lot of execution risk. But credit to management at Broadcom, they’ve picked good targets and integrated well.

    But a business can’t rely on acquisitions to grow forever. Organic growth is preferable. For semiconductor businesses, this comes from creating new chips and needs large spending in research & development (R&D).

    It’s encouraging to see Broadcom continue to invest in building out organically, R&D as a portion of revenue came in at a healthy 17.7% last year.

    Spending brings us nicely on to the balance sheet, which carries a little more debt than we’d like because of the acquisitions. Net debt stands around $29bn, which is considerably higher than most peers and over three times operating profit. That’s not a deal breaker, but we’d like to see that come down sooner rather than later.

    Broadcom’s diverse footprint has a lot going for it and offers something different to the broader sector. Plus, there’s a prospective dividend yield of 2.6% on offer, with the group growing its dividend each of the past 11 years – though no dividend is ever guaranteed.

    The positive outlook and surge in demand for chips means the valuation has risen recently. It now trades on a price to earnings ratio a touch north of 17. That’s above the long-term average, so pressure to keep delivering consistent growth is mounting.

    SEE THE BROADCOM SHARE PRICE, CHARTS AND OUR LATEST VIEW

    Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

    This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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