Morgan Stanley no longer considers$NVIDIA Corp(NVDA)$ its No. 1 chip pick, and is now turning to a different part of the sector for its latest top endorsement.

Morgan Stanley analyst Joseph Moore has elevated $Western Digital(WDC)$ to his No. 1 recommendation, bumping Nvidia’s stock down to second place.

While artificial intelligence is the hot theme in chips these days, Moore isn’t calling out AI so much as cheering the potential for more than 25% upside in shares of Western Digital, which makes computer data-storage products. He sees an “extremely compelling” valuation gap between Western Digital shares and peer names, and he’s upbeat that an upcoming separation of the memory- and hard-drive chip company will translate to value for investors.

“While the market appeared to favor consolidation scenarios, the decision to separate the hard-disk-drive and memory assets towards the end of the year actually simplifies the story completely,” Moore wrote in a Monday note to clients.

He also flagged improvements in NAND memory trends as a tailwind. “We are seeing NAND prices up more than 20% [on a sequential basis in the first quarter], more in some areas,” he wrote. “Given that the company had already guided to positive gross margins in the December quarter, we should already be at midcycle gross margins in the March quarter, in contrast to memory peers.”

Admittedly, Moore has a “somewhat mixed” view of the longer-term NAND cycle, noting that “fab utilization is quite low, and will rise imminently.” That trend is “bad for economics,” he continued, but there have also been few new entrants into the NAND market recently.

He upped his price target on the stock to $73 from $52, with the new target representing 27% upside from midday levels Monday. The stock was trading up 5.2% at last check Monday.

Moore continues to like Nvidia’s stock, which is his top pick among compute names, though he called out the strong stock-market rally for the maker of graphics processing units over the past month: It’s gained 22% in that span.

“All of the AI stocks have rallied, and with the potential for AI to

come off of allocation in [the second half of 2024], there could be some headwinds to consider,” he said. “That said, Nvidia has rallied less than other companies in the AI supply chain, while retaining the premiere position, and does have material upside for the next couple of quarters at least, and key products such as H200 and B100 should add to investor comfort with the company’s market leadership.”