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The chip industry is threatened by slowing growth, but that doesn’t mean you shouldn’t buy into stocks of top companies such as Intel (INTC), Micron Technology (MU) and Advanced Micro Devices (AMD), according to a report this morning from David Wong of Wells Fargo.

A recovery in the semiconductor industry that began in the second half of 2016 has continued this year and is going to continue in 2018, writes Wong, even though he’s “cautious” about the industry, given that growth is set to slow this new year.

"The chip industry crossed over from year/year declines in the first half of 2016 to year/year growth in the second half,” writes Wong.

“However, monthly year/year growth comparisons did peak in mid-2017,” notes Wong, and, "We are projecting continuing growth deceleration through 2018 for semiconductors overall, driven by a moderation in memory growth."

Growth in 2016 was in a sense perhaps “pent-up demand” for chips after several years of “sub-par” growth for the industry, he explains:

The 5% growth of 2013 followed a 3% decline in 2012, resulting in almost no growth for the two year period 2012-2013. Growth of 10% in 2014 was follow by two more years (2015 and 2016) of very little growth. During this period global GDP was in 3-3.4% range for every year, and the Wells Fargo economic projects have global GDP growth remaining firm in the 3.4-3.5% range in 2017 and 2018. We think the numbers in our table suggest there may have been a fair amount of pent-up demand in the semiconductor end markets created in the 2012-2016 period, driving a recovery in semiconductors spanning 2017 and 2018 and possibly extending into 2019.

For memory chips, such as DRAM and NAND, prices of DRAM and the move to “3-D” NAND should continue to be good for Micron, even though the market’s going to grow more and more slowly as the year moves on:

Rising memory prices drove significant growth in semiconductor memory in 2017. Memory sales are on track for close to 60% year/year growth in 2017. We think that memory growth will continue in 2018 but probably moderate significantly from 2017 growth. Our projections have the memory segment entering 2018 at close to 40% year/year growth in the month of January 2018 and finishing the year at perhaps below 10% year/year growth in the month of December 2018. On balance we view the possibility of continuing memory growth to be a positive for memory chip companies and semiconductor equipment makers, but we also recognize that there could be risk associated with the possibility of rapid deceleration from the very high memory growth levels of 2017.

Another area besides memory that still has opportunity is self-driving cars. And he likes Intel in particular in this market, calling the stock his “top pick” for 2018.

"Intel’s recent acquisition of Mobileye has, in our view, given Intel a leadership position in chips for autonomous driving applications,” writes Wong.

Other chip makers that could benefit from self-driving cars, and from automotive overall, are analog chip makers Maxim Integrated Products (MXIM), Texas Instruments (TXN), and Analog Devices (ADI).

Wong likes server chips in 2018, especially things for machine learning, writing "We think that the data center is the nexus of a number of important new growth areas of the future, including artificial intelligence, autonomous driving, internet-of-things and 5G communications."

He particularly likes AMD’s chances in servers in 2018, with its newer Epyc part:

In the past AMD was been a meaningful second-source provider of x86 processors for servers. However, many years ago AMD’s server products began to fall behind Intel’s in performance, and AMD’s share in server processors dropped to negligible levels. In mid 2017 AMD introduced a new server processor family, EPYC, which appears to have very competitive performance characteristics. We think that EPYC has given AMD a means to re-engage in the x86 server processor market [...] We think that AMD will begin to demonstrate meaningful market share momentum in the server processor market. We believe that AMD will be able to grow its server processor market share from below 1% unit share in 2017 to perhaps as much as a run rate of 5% unit share and 3% revenue share by the end of 2018 and 10% unit share/6% revenue share by the end of 2019.

Intel can also benefit, writes Wong: "Intel’s datacenter growth may well accelerate to the double digit percent growth range in 2018, from the high single digit percent growth Intel achieved in 2017."

For Nvidia (NVDA), whose shares Wong rates Underperform, he reiterates that rating today, writing that the company is facing sharply slowing growth in 2018:

We think that Nvidia will continue to enjoy growth in its datacenter segment. However we suspect that growth will decelerate significantly from the very high levels achieved in the least two years. We view this as a risk for Nvidia’s stock given high investor expectations.