NVIDIA and other chip stocks are expected to grow despite challenges in the near future, BofA Securities has stated.
Cloud computing, the automotive industry, and complexity continue to support the bullish view, and other chip stocks such as Broadcom (AVGO) and NVIDIA (NVDA) may face several challenges in the short term, BofA Securities said in a note on Monday.
Analysts, including Vivek Arya, say that the SOX index has risen 23% this year, making semiconductor companies one of the largest companies in the S&P 500 index. Previously, chip stocks and the SPX market as a whole had similar price-earnings ratios, but since November 2022, the SOX index has traded at a higher premium.
However, analysts say factors such as rising interest rates, US elections, geopolitical tensions, negative news about artificial intelligence, and seasonal weakness in Q3 could present challenges for SOX for the time being.
Currently, the world's top 5 semiconductor equipment stocks are trading at a 46% premium compared to the historical average, and are trading at a price-return ratio of 26 times expected earnings compared to expected earnings for 2025. Meanwhile, the historical average is 18 times higher.
They said they expect this premium to continue due to factors such as the increasing complexity of chips due to AI, efforts to return manufacturing domestically, and strong free cash flow margins for stocks (which have remained above 25% even during the recent downturn in the semiconductor industry).
“Industrial/automotive chip stocks can be supported by the end of inventory corrections that provide diversification from AI and support steady 2x sales growth along with easy comparisons to advance to 2025. However, analog stocks are currently trading at a tight valuation that compensates for the strong yet still uncertain macro recovery,” the analysts said.
BofA Securities raised NVIDIA's price target from $1,320 to $1,500 while maintaining a buying rating. Analysts said the change is justified based on an expected price-return ratio of 42 times the expected revenue for 2025 excluding cash. This assessment is justified by considering that the gaming cycle has bottomed out and there is a possibility of strong long-term demand in the data center sector.
Analysts, including Vivek Arya, say that the SOX index has risen 23% this year, making semiconductor companies one of the largest companies in the S&P 500 index. Previously, chip stocks and the SPX market as a whole had similar price-earnings ratios, but since November 2022, the SOX index has traded at a higher premium.
However, analysts say factors such as rising interest rates, US elections, geopolitical tensions, negative news about artificial intelligence, and seasonal weakness in Q3 could present challenges for SOX for the time being.
Currently, the world's top 5 semiconductor equipment stocks are trading at a 46% premium compared to the historical average, and are trading at a price-return ratio of 26 times expected earnings compared to expected earnings for 2025. Meanwhile, the historical average is 18 times higher.
They said they expect this premium to continue due to factors such as the increasing complexity of chips due to AI, efforts to return manufacturing domestically, and strong free cash flow margins for stocks (which have remained above 25% even during the recent downturn in the semiconductor industry).
“Industrial/automotive chip stocks can be supported by the end of inventory corrections that provide diversification from AI and support steady 2x sales growth along with easy comparisons to advance to 2025. However, analog stocks are currently trading at a tight valuation that compensates for the strong yet still uncertain macro recovery,” the analysts said.
BofA Securities raised NVIDIA's price target from $1,320 to $1,500 while maintaining a buying rating. Analysts said the change is justified based on an expected price-return ratio of 42 times the expected revenue for 2025 excluding cash. This assessment is justified by considering that the gaming cycle has bottomed out and there is a possibility of strong long-term demand in the data center sector.
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