The Chip Sector Faces Challenges, but AI-Levered Companies Offer Potential Opportunities
The chip sector faces challenges, but AI-levered companies like Nvidia and Broadcom offer potential opportunities for investors. Selective bets can be made with a focus on earnings reports and the connection to AI technology.
Troy D. Hanson
October 05, 2023
The chip sector has experienced a decline of around 7% since the beginning of July, presenting challenges for investors. Evercore ISI analyst Matthew Prisco suggests that a return to outperformance may be difficult in the near term. However, Prisco highlights potential "silver linings" that could be found in upcoming chip-sector earnings reports and advises investors to make selective bets.
Prisco specifically favors companies that are benefiting from artificial intelligence (AI). He identifies Nvidia Corp. (NVDA) and Broadcom Inc. (AVGO) as possible winners during this earnings season, due to their connection to the AI theme. Prisco explains that although there may not be any major positive or negative developments regarding traditional datacenter spending, demand is likely to stabilize as inventories normalize. Consequently, he continues to recommend exposure to AI-levered companies.
Among these companies, Nvidia holds the top spot as Prisco's preferred pick. He believes Nvidia is well-positioned for earnings season due to the sustainability of AI spend and the potential for beating expectations. Furthermore, he notes that Nvidia's valuation is surprisingly attractive, with earnings per share projected to exceed $20 by calendar year 2024.
In conclusion, while the chip sector faces challenges, there are still opportunities for investors, particularly in companies leveraging AI technology. Nvidia stands out as a top pick with its strong positioning and appealing valuation.
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The Opportunity for Broadcom in the AI Market
Broadcom, a prominent player in the semiconductor industry, is not only capitalizing on AI but also focusing on a smooth transition and finalization of its deal with VMware Inc. The deal is set to be closed later this month and is expected to bring positive outcomes for Broadcom. With a track record of beating expectations and providing positive commentary during earnings seasons, the company is well-positioned for significant growth until 2024. Given these factors, AVGO is likely to outperform in the market.
Micron Technology: A Promising Investment
Investors are advised to adopt a bullish stance on Micron Technology Inc. Despite its AI-focused chip not making an immediate impact on its financial results, there are indications that a promising recovery is underway. While the initial rebound may not be as robust as desired, the coming earnings season is expected to shed light on the positive trend in the memory market. This makes Micron Technology an attractive investment option.
Qualcomm: A Potentially Lucrative Investment
Qualcomm Inc., a leading semiconductor company, presents a compelling "tactical long" investment opportunity. Potential catalysts, including the extension of its modem deal with Apple Inc., make Qualcomm an appealing choice. While semiconductors aligned with consumer markets are currently facing headwinds, Qualcomm stands out as a company with a favorable risk-to-reward ratio. Investing in QCOM today is considered advantageous.
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