The Time to Worry is Clearly Not Now When NVIDIA's Stock is Set to Extend Gains

Semiconductor stocks, as a group, are only slightly outperforming the broader market this year, as some of the sector’s momentum has cooled in recent months. According to Stacy Rasgon, an analyst at Bernstein, the PHLX Semiconductor Index (SOX) was just 120 basis points ahead of the S&P 500 so far in 2024, compared to a significant 2,000 basis points of outperformance three months ago. This reflects a shift in sentiment as the sector experiences a slowdown.

‍

Earlier in the week, the S&P 500 actually outpaced the PHLX Semiconductor Index, before a strong rally in chip stocks on Wednesday helped close the gap. The recent slowdown in semiconductor stocks, according to Rasgon, is largely driven by cooling enthusiasm around artificial intelligence (AI). He noted that while AI has been a major growth driver for the semiconductor sector, investor excitement seems to have paused temporarily. Outside of AI, other areas of the semiconductor market, such as automotive and industrial chips, are still struggling, with investors searching for signs of a bottom and debating the trajectory of recovery in these segments.

‍

Looking ahead, Rasgon believes investors should focus on the sector’s two largest names, which he recommends as his top picks. One of those names is Nvidia Corp. Despite concerns among investors about the sustainability of Nvidia’s rapid growth, Rasgon argues that now is not the time to worry. He acknowledges that Nvidia’s numbers are rising rapidly, but he sees no immediate reason for concern.

‍

Ahead of Nvidia’s earnings report last month, some investors were worried about potential delays with the company's Blackwell chip, but Rasgon has dismissed those concerns as overblown. He believes the impact of any delays will be minimal, with substantial revenue expected from the new chip lineup in Nvidia’s fiscal fourth quarter. Furthermore, Rasgon anticipates a "massive ramp" in growth next year.

‍

In the meantime, demand for Nvidia’s existing Hopper lineup remains strong, and supply constraints that previously hampered production are now easing. Rasgon expects Nvidia’s margins, which could range from 73% to 74% in the fiscal fourth quarter, to improve further next year as the company optimizes costs related to its Blackwell chips and sees pricing stabilize. Overall, Rasgon remains highly optimistic about Nvidia’s future growth, advising investors to stay with the stock. Nvidia’s shares rose 1.8% in early trading on Thursday, following an 8% surge on Wednesday.

‍

Broadcom Inc. is Rasgon’s second top pick in the semiconductor space. While Broadcom’s core semiconductor business has faced pressure, the company continues to see strong momentum in its AI segment. Rasgon is optimistic about Broadcom’s outlook, noting that the core business could improve in 2024. Additionally, Broadcom’s acquisition of VMware, which was initially met with skepticism, is now exceeding expectations, providing an extra boost to the company’s growth prospects.

‍

Rasgon emphasized that the pullback in Broadcom’s stock presents a buying opportunity, describing the company’s story as "very attractive." In Thursday’s morning trading, Broadcom shares climbed 5%, reflecting investor confidence in the company’s future potential.

‍

In addition to Nvidia and Broadcom, Rasgon also highlights Qualcomm Inc. as another recommendation. Qualcomm has been dealing with a challenging smartphone cycle, but Rasgon believes the worst is over. In a recent earnings call, Qualcomm’s management took steps to de-risk its outlook for the December quarter, signaling to investors that the company is moving past the most difficult phase of this cycle.

‍

However, Rasgon cautions that there is still a potential overhang on Qualcomm’s stock due to concerns about its relationship with Apple Inc. Apple is reportedly considering moving more of its business away from Qualcomm, a risk that may take time to resolve. Despite these concerns, Rasgon believes Qualcomm is well-positioned for a recovery, though investors should remain mindful of this uncertainty. Qualcomm shares were down 0.9% in early trading on Thursday.

‍

Overall, Rasgon’s outlook for the semiconductor sector reflects a mix of caution and optimism. While some areas of the market are still struggling, particularly in non-AI segments like automotive and industrial chips, AI-driven growth remains a key bright spot. Nvidia and Broadcom stand out as top picks, with robust growth prospects in the near term. Meanwhile, Qualcomm, despite its challenges, may be on the path to recovery as the smartphone market stabilizes. Investors should remain aware of the risks but may find attractive opportunities in these key semiconductor names.

‍