Chip stocks will regain momentum over AI demand: Analyst

The chip sector saw a brief recovery last week after a large sell-off, with Nvidia (NVDA) once again leading the charge. Looking forward, chip stocks look to regain momentum after August volatility, but can they capture their previous heights?

KeyBanc Capital Markets Equity Research Analyst John Vinh joins Morning Brief to give insight into the chip sector and how semiconductor stocks may perform as Big Tech leans harder into AI.

"I think if you look at the sell-off over the last several weeks related to the chip sector, maybe more specifically to Nvidia, I think one, you had some concerns about maybe hyper scaler CapEx [capital expenditures] getting to kind of peak levels, but I think those were largely addressed later when you had comments coming out from Microsoft (MSFT) that it's still seeing phenomenal demand on the AI front, and it's actually supply-constrained," Vinh says. "The second factor is there's some concerns out there that its next-generation Blackwell product could be delayed. I wouldn't find that too surprising."

In terms of how the stock may perform, Vinh believes Nvidia will "beat and raise, we don't think near-term demand is going to be an issue at all."

Nvidia is scheduled to report second quarter earnings on Wednesday, August 28.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

Stocks are looking to regain footing after a volatile week for market semiconductor ETF in particular, bearing a bit of the brunt of the market route last week.

But let's focus on the chip giant and video losing over $900 billion in market cap since its prior highs back in June, it did recover towards the end of the week and does continue to rise as investors anticipate earnings coming up in a few weeks here.

So joining us to discuss what is next in the chip space.

We've got John Vin.

He is Key Bank's capital markets, equity research analyst, John, it's it's great to speak with you.

So obviously, the volatility impacted the entire market and chip stocks.

Of course, we're a part of that.

What do you think will be the single biggest driver of chip stocks moving forward in the next couple of weeks as we do wait for those in video earnings?

Yeah, I think you're gonna have um maybe a couple of earnings reports before NVIDIA.

You've got um Ed I reporting next week which you know, obviously is gonna be a read on the broader recovery from a cyclical perspective.

But I think outside of that, I think all eyes are going to be focused on Nvidia's earnings in in two weeks.

John, what do you think we're going to hear from NVIDIA because we talk about the lack of catalyst between now and then.

Do you think they're going to meet and exceed expectations?

Which is ultimately the huge question right now?

Uh Yes we do.

Um I think if you look at the sell off over the last several weeks related to the chip sector and maybe more specifically to NVIDIA.

Um I think one, you have some concerns about maybe uh hyperscale Capex getting to kind of peak levels.

But I think those were largely addressed later when you had comments coming out from Microsoft that it's still seeing phenomenal demand on the A I front and it's actually a supply constrained.

Um And then obviously the second factor is, you know, there's some concerns out there that um it's next generation Blackwell product could be delayed.

Um You know, I wouldn't find that too surprising.

You know, they're on an annual chip cadence, which is uh something that's really never been done before within the A I industry.

Typically you're on a 2 to 3 year cadence.

So if you're kind of moving to an annual cadence, I, I don't think that's surprising.

And I think investors, if it's really a supply timing issues, I think most investors are willing to kind of look through that if it was a demand issue.

I think we'd have other issues here with, with NVIDIA.

But, but from our perspective, we think they'll beat and raise.

We don't think near term demand is going to be an issue at all.

What do you anticipate the market reaction to that looking like?

Because we have seen NVIDIA come out in the past and be and raise and the market has not necessarily rallied around that news because the anticipation is so baked in, I would say with a pull back in the stock to around 100 $100 I think a be it in a raise, assuming that it's pretty solid um should be should be adequate.

You know, if you think about Nvidia's valuation at these levels, we think they're gonna do, you know over five bucks and change next year, you're trading at 20 times, which is um you know, puts, puts NVIDIA almost into kind of value stock range relative to the broader semiconductor market, which is kind of trading at kind of mid, mid to high twenties right now.

So John, there's lots to like, it sounds like about NVIDIA.

What would you tell investors is the most compelling second source play on A I. Um We like monolithic power, their derivative play on NVIDIA, they supply power management solutions to the majority of Nvidia's GP U solutions in the next generation, Blackwell.

They're also going to gain significant amounts of content, the A PS are going to go up 40% and then they're also gaining share at, at other providers.

They're also now supplying power to E and D GP U.

And later this year, we think they're also going to share at uh on Google's GP U.

What do you look at to indicate that thesis, John because, and I asked, because I was going to ask you about your call on my, you did trim your price target and, and you noted a couple of reasons why particularly given the demand for the data center piece there.

But what is the one thing that investors should take a look at when they are determining the long term potential gains of an A I play?

Yeah, I would say kind of barriers to entry.

You know, I think uh when you think about NVIDIA, it's obviously got a significant advantage advantage from a soft remote perspective with C A. Um and also just their, their competitiveness if you look at their next generation blackball solution, particularly the GB 200.

Uh This is not an incremental performance uh improvement that you typically get when a, when a semiconductor company releases their next generation chip.

This is a pretty transformational release where they're moving from a chip based solution to a full stack server rack solutions where there's gonna be potentially a 20 to 30 X uh performance improvement.

So I think that's kind of what you're gonna be focused on when you look at A I places, will they be able to continue to kind of uh push the envelope in terms of improving their um performance leadership?

So then John, where does that leave some of those other secondary plays?

When you take a look at A MD, some socks that had been on a volatile run here over the last several months, some of that negative moves that we had been seeing leading up to the last couple of weeks to the downside.

Was that a bit overdone?

And do you see significant room to the upside?

Um I do, I do, I think uh we still um like a MD quite a bit.

Um I think when NVIDIA first released their GB 200 platform, I think there were some concerns out there of whether anyone else in the marketplace can compete and keep up with, with NVIDIA, I, I would say a couple things, right, obviously, the, the delay, the potential delay with blackwall potentially gives um a MD a little bit more breathing room.

And in the history of technology, we have never seen somebody have a kind of a monopolistic position.

It's just not sustainable, the market forces will not allow it.

We think a MD has a competitive uh solution in M I 300 X.

You know, we think they're going to do uh $6 billion in revenue this year, which is obviously very small compared to what NVIDIA is going to do, but it's uh it's notable.

All right, John Vin.

Great to get your insight here.

Thanks so much for breaking down some of the recent moves that we've been seeing within the chip space equity research analyst at key bank capital markets.

Thanks so much.