Nvidia earnings are a test for chip stocks as software has stolen the limelight

MW Nvidia earnings are a test for chip stocks as software has stolen the limelight

By Emily Bary

Nvidia's earnings could give a jolt to other AI semiconductor plays if the outlook impresses, but don't expect software stocks to lose shine during a seasonally strong quarter

While semiconductor stocks have been hot in theory this year, their performance recently hasn't been so strong.

The PHLX Semiconductor Index SOX has gained about 2% since the election, while the iShares Expanded Tech Software Sector ETF IGV is in the midst of a seven-session rally that's brought a 13%-plus increase. Chip stocks have also lagged the S&P 500's SPX roughly 5% gain in that time.

Can Nvidia Corp.'s $(NVDA)$ earnings report on Wednesday catalyze the chip sector once again? If the company's outlook is strong enough, that should lift other chip names, according to Mizuho desk-based analyst Jordan Klein. At the very least, it could help artificial-intelligence plays like Broadcom Inc. $(AVGO)$, Marvell Technology Inc. $(MRVL)$, Advanced Micro Devices Inc. $(AMD)$, Micron Technology Inc. $(MU)$ and Taiwan Semiconductor Manufacturing Co. Ltd. $(TSM)$, he wrote.

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Nvidia's report is "the major focus event" for the chip sector that's still to come this year. Buy-side estimates range from $36 billion to $39 billion when contemplating Nvidia's January-quarter outlook, and Klein thinks Nvidia has to strike the midpoint of that range or higher - "or the stock gets hit hard."

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In the meantime, he's watching the investor rotation into software names. It wasn't so long ago that fund managers worried about missing out by not having enough exposure to the red-hot chip sector. But as software stocks have sought to play catch-up in recent weeks and months, that "fear of missing out" has transferred over to that portion of the technology market.

Klein wrote that recent results from companies like Fortinet fostered "more FOMO chase potential amongst investors desperately seeking more software and alpha potential in tech as much of semis and hardware lag and Internet remains very spotty." That "FOMO" mentality can help explain dramatic moves higher for stocks like Shopify Inc. (SHOP) (CA:SHOP), which reported recently, as well as what he deems "under-owned names" like Twilio Inc. (TWLO), which is up 38% in two weeks.

And the good news for software investors is that the fourth quarter is seasonally strong for the sector. Customers have a "use it or lose it" mentality with budgets that "can help software demand and [revenue] trends" through the end of the fourth quarter, "creating investor view that [revenue] and demand are accelerating," Klein wrote.

While he thinks some software stocks could become "overbought," he also doesn't predict a near-term pullback.

"While software stocks may need to digest some of the post election rally in the near-term, we believe the set up continues to look attractive into year end," Evercore ISI analyst Kirk Materne added in a weekend note.

-Emily Bary

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November 13, 2024 10:19 ET (15:19 GMT)

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