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.”
Nvidia shares gained 2.1% in morning trading.
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 and 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 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.
SOURCE: BANK OF AMERICA
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.
Source: Bank of America
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, 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, 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.
Source: Bank of America
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.”
