Nvidia Is Morgan Stanley's Favorite Chip Stock Again. Here's Why

Key Takeaways

• Morgan Stanley analysts named Nvidia their top semiconductor stock, citing its relatively low valuation and confidence that AI spending will support rapid growth for years to come.
• The analysts expect Nvidia’s GPU Technology Conference later this month will help dispel concerns about market share that have been a headwind for the stock.

Nvidia, the one-time poster child of the AI craze, is poised to regain some of its magic, according to some experts.

Morgan Stanley analysts on Tuesday named Nvidia (NVDA) their top semiconductor pick, citing an attractive valuation and a belief that conviction in the stock is primed to bounce back.

Nvidia was last Morgan Stanley’s top semis pick in September, when the firm transferred that title to memory device maker Sandisk (SNDK) amid a surge in demand for data center storage solutions. Sandisk was replaced by memory chip maker Micron (MU) in November.

Why This Is Important

Over the past three years, Nvidia’s earnings and stock have, respectively, become bellwethers of AI demand and enthusiasm on Wall Street. Recently, earnings expectations and the stock have diverged, underscoring Wall Street’s growing skepticism of AI even as companies spend hand over fist on the technology.

Since making those changes, Sandisk and Micron stocks have skyrocketed while Nvidia has languished. The stock is down about 8% since last week’s blockbuster earnings report, with concerns about market share challenges and the sustainability of GPU demand weighing on sentiment.

Morgan Stanley’s analysts on Tuesday called Nvidia stock’s forward price-to-earnings ratio of 18x “a surprisingly good entry point” for a stock that they expect is poised to get its groove back.

Shares have been pressured recently by concerns that hyperscalers like Microsoft (MSFT) and Amazon (AMZN) are already spending the most they possibly can on AI infrastructure. The argument goes: Nvidia’s growth can’t accelerate from here because there’s no more fuel in the tank.

Morgan Stanley does see ways for hyperscalers to up their spending. They can tap financial markets for fresh capital, and they can direct revenues from their rapidly expanding cloud computing businesses back into that business.

There is also ample evidence that Nvidia’s biggest customers want to increase their investments. Hyperscalers are paying in-full, upfront on 3-year memory supply orders, according to the analysts, who ask: “Are they doing that with the intent of slowing spending next year?”

“There is simply no indication that the current investment cycle has run its course, and there is plenty of evidence that the spenders intend to keep spending for at least a couple more years,” the analysts wrote.

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As for the market share concerns, Morgan Stanley acknowledges that competitors like Advanced Micro Devices (AMD) and custom chip designer Broadcom (AVGO) are likely to grow faster than Nvidia this year. However, that growth difference is driven more by Nvidia’s dominance in the market—they estimate it captures 85% of all AI chip revenue—than by competitors chipping away at its moat by releasing superior products. It’s easier to double $1 billion of revenue than $100 billion.

Morgan Stanley expects Nvidia’s GPU Technology Conference later this month will allay Wall Street’s market share worries. They predict the conference will “look very similar to 2024, when we got a full look into NVIDIA’s 4 year roadmap and it became clear that this race is not just about the silicon, but also rack and ecosystem development.”

Trading in Nvidia’s stock so far this year also bears a striking resemblance to the past three years. At the beginning of each of those year, “there was skepticism about the following year, and each time when visibility filled in and we realized the strength was durable, the stock had bursts of outperformance.”

The analysts say that skepticism will prove right one year, but probably not this one.

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