Chip sector due a May bounce with Nvidia near 'trough valuation,' say Bank of America strategists

By Jamie Chisholm

Critical information for the U.S. trading day

The big-tech trade is having a wobble. The Magnificent 7 is being picked off one by one like their cinematic peers. The posse has left Tesla (TSLA) in the dirt, and Apple (AAPL) is straggling.

Now Meta (META) is under fire, its shares showing a 13% plunge early Thursday as investors fear boss Mark Zuckerberg is going back to his big-spending ways.

Even Nvidia (NVDA) has been running for cover. The chipmaker's shares sat within 30 bucks of the $1,000 milestone a month ago, and since then it has lost 11.8%.

Fear not, says a team of equity strategists at Bank of America, led by Vivek Arya: a sell-off for the semiconductor sector is typical in April, things tend to get better in May, and Nvidia is now trading around a "trough valuation."

They recognize that sentiment has been hit of late by a variety of factors, including stagflation risk, rising interest rates, geopolitical worries, AI fatigue, and uninspiring near-term outlooks from industry barometers Taiwan Semiconductor Manufacturing (TSM) and ASML (ASML).

In addition, "demand trends in consumer (PC, phones), enterprise and autos are lukewarm," says BofA.

All that has helped push the PHLX Semiconductor Index SOX down 7.7% over the last month. The good news is the direction - if not the distance - is typical of seasonal trends, as the chart below shows, possibly because of pre-earnings jitters. May usually provides a rally, often the second best of the year.

However, cyclical factors should also support the semiconductor sector. Inventories are normalizing and sales could grow year-on-year through to the middle of 2026.

"We remain constructive on chip stocks as we are only in quarter 3 of what is usually an average 10 quarter upcycle," says BofA.

Worries about sales to the automotive and industrial sectors should alleviate too, with BofA reckoning they will bottom in the third quarter of this year and then pick up as long-term auto demand trends tied to electric vehicle adoption remain intact.

The BofA team's favorite pick for this sector is NXP Semiconductors (NXPI), with a price target of $300, because it is trading at only 14 times estimated 2025 earnings and with the market applying the "lowest recovery expectation in Q2."

In the semiconductor equipment sector BofA favors KLA Corporation (KLAC), price target $850, because its "leading profit margin and less cyclical topline supports a slightly higher multiple vs. semicap peers." The bank also likes Applied Materials (AMAT), price target of $222, though it notes the risk of the ongoing U.S. government probe into China shipments.

And in the data center sector BofA's top buy is Nvidia . "Despite some crowding, stocks of chipmakers exposed to U.S. hyperscalers remain the best neighborhood," says BofA.

Capex on AI could grow 26% year-on-year in 2024, and possibly more, as customers are still in year two of what should be a three to four-year intensive AI buildout.

Nvidia is trading around 25 times its forecast price/earnings ratio for calendar year 2025, which is near the levels the stock troughed in December 2023, June 2022 and September 2019, BofA notes.

BofA's price target of $1,100 for Nividia is based on applying a 37 multiple to earnings for 2025, excluding cash, which it says is "justified given stronger growth opportunities ahead as gaming cycle troughs and data center demand potentially faces strong, long-term demand dynamics."

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are lower as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is down, while oil prices (CL.1) gain ground and gold (GC00) is trading around $2,325 an ounce.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

First quarter U.S. GDP rose 1.6% on an annualized basis, lower than forecasts of 2.4%. However, weekly initial jobless claims fell to 207,000, lower than the 217,000 estimate, suggesting the labor market remains in good health.

Pending home sales for March will be published at 10 am. Eastern.

Microsoft (MSFT) and Alphabet (GOOGL) were trading lower after Meta's poorly-received earnings call, as both tech giants report their own reports after the close.

Caterpillar shares (CAT) are down nearly 4% after the company came up a bit short on first-quarter revenue as sales volumes declined.

Shares of IBM (IBM) are dropping more than 8% in premarket action after results showed deceleration in consulting business.

Anglo American shares (UK:AAL) (NGLOY) jumped more than 10% in London after the miner said it had been approached to make a deal by BHP (UK:BHP) (BHP).

Best of the web

The fall of the Queen of Airbnb.

TSMC's debacle in the American desert.

Chinese villagers jumped at the deal of a lifetime - then it turned sour.

The chart

The Bank of Japan concludes its monetary policy meeting Friday. No change in interest rates is expected. But will it err on the hawkish side in order to support the yen (USDJPY), which Thursday morning moved to a fresh 34-year low of 155.7 per dollar. The chart below from Thierry Wizman, strategist at Macquarie, shows speculators are vey badly positioned for any sudden strengthening of the Japanese currency.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   META    Meta Platforms 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   AAPL    Apple 
   TSM     Taiwan Semiconductor Manufacturing 
   AMC     AMC Entertainment 
   AMZN    Amazon.com 
   NIO     Nio 
   MSFT    Microsoft 

Random reads

Chicago's sidewalk 'rat hole' is no more.

Medical workers ask bite victims to stop bringing snakes to hospitals.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet. MarketWatch's Jeremy Owens trains his eye on what's driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-25-24 0844ET

Copyright (c) 2024 Dow Jones & Company, Inc.