Nvidia's stock extends gains: 'The time to worry is clearly not now'

By Emily Bary

Bernstein continues to like Nvidia and Broadcom shares as top semiconductor picks, even as the sector has shed most of its year-to-date outperformance relative to the S&P 500

You're eyes aren't deceiving you: Semiconductor stocks as a group are barely ahead of the S&P 500 on the year, as "some of the air has leaked out of the sector recently."

That's according to Bernstein analyst Stacy Rasgon, who noted ahead of Thursday's open that the PHLX Semiconductor Index SOX was just 120 basis points ahead of the S&P 500 SPX so far in 2024, whereas the chip index had been outperforming by 2,000 basis points three months ago.

That said, the S&P 500 was outperforming the PHLX Semiconductor Index as recently as earlier this week, before a big Wednesday chip surge.

Nevertheless, the relatively recent cooling for semiconductor stocks comes as "AI sentiment takes a bit of a breather," Rasgon wrote. Meanwhile, in non-AI areas of the chip market like automotive and industrial chips, the "search for the bottom ... continues, as well as the debate on the overall recovery trajectory."

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So how should investors think about the sector going forward? Rasgon recommends the two biggest names as his top picks.

That, of course, includes Nvidia Corp. (NVDA)

"Yes, the numbers are so good (and moving so high, so fast) that investors worry about sustainability," he wrote. "However, the time to worry is clearly not now."

Read: Nvidia CEO Jensen Huang addresses the big question on investors' minds

While investors had been concerned about the prospect of Blackwell delays heading into Nvidia's earnings report late last month, that issue appears "to be mostly a nothing-burger," according to Rasgon, since the company can still see "substantial" revenue from the new chip lineup in the fiscal fourth quarter ahead of a "likely massive ramp next year."

At the same time, there's still robust demand for Nvidia's current Hopper lineup, and supply of that product is improving after many quarters of constraints.

See also: Nvidia is expected to grow quickly through 2026. These companies may grow faster.

How about the other concerns dogging some Nvidia investors? "Margin worries appear overblown to us," he wrote. The fiscal fourth quarter could see 73% to 74% margins that may prove "the bottom, with room for improvement next year as Blackwell costs get optimized and pricing firms up, and numbers continue to have an upward bias from here. We think you still have to be there."

Nvidia's stock is up 1.8% in morning trading Thursday after surging 8% in Wednesday action.

As for Broadcom Inc. (AVGO), the other of his top picks, Rasgon notes pressure in the "core" semiconductor business but momentum in artificial intelligence. And he sees an upbeat path ahead, as the core business could improve next year while the VMware deal "is markedly exceeding expectations."

"The story still looks very attractive to us especially post-pullback," Rasgon wrote.

Broadcom's stock is up 5% in Thursday morning trading.

Another of his recommendations? Qualcomm Inc.'s stock. (QCOM)

"We are finally on the other side of what has been a horrendous smartphone cycle, and the company took pains to de-risk [the December quarter] on their last call," he wrote. Still, investors should be mindful of the "overhang" presented by the looming risk that Apple Inc. (AAPL) will look to move more business way, and that cloud "may need some time to clear."

Qualcomm shares are down 0.9% early in Thursday's trading action.

-Emily Bary

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09-12-24 1115ET

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