Nvidia's stock is one of the S&P 500's best performers in Monday action as BofA outlines why a 'rebound' scenario makes sense for the semiconductor sector
If the semiconductor sector bounces back, Nvidia Corp.'s stock looks like a good play, according to BofA analyst Vivek Arya.
He assumes a sector rebound, likely in the fourth quarter of this year, as seasonal headwinds could fade by then. Investors await Nvidia's $(NVDA)$ earnings report later this month, but September has traditionally been the worst month for the PHLX Semiconductor Index SOX, Arya said, which is why some patience may be required.
The good news is that the calendar fourth and first quarters typically are much better for chip stocks, a dynamic that is helping fuel Arya's prediction for a rebound. In such a situation, shares of Nvidia, Broadcom Inc. $(AVGO)$ and KLA Corp. $(KLAC)$ are his top picks, as those companies are "the most profitable vendors in their respective end markets."
Nvidia shares are up 5.8% and are among the leading S&P 500 gainers in Monday action. KLA shares are up 1.6% and Broadcom shares are up 1.1%.
Arya noted in a Monday report that the semiconductor "upcycle" has only lasted four quarters thus far, with the PHLX Semiconductor Index up 28% in that time. On a historical basis, such cycles have gone on for 10 quarters on average and brought a 67% move higher for the index.
Investors have been worried about whether artificial intelligence will deliver the necessary return on heavy investment spending, and Arya said those concerns are "valid but premature and inconclusive."
For one, AI spending "is as much defensive (protecting search, social or e-commerce dominance) as it is offensive (new revenue streams)," he wrote. Additionally, enterprise and sovereign adoption of AI is still in the early stages, and Nvidia's new Blackwell chip that's "best suited for AI" has yet to start shipping.
"In other words, waiting for large cloud providers to confess about low AI [return on investment] is a wasted cause" - at least until 2026, Arya wrote. And he argued that while semiconductor stocks exposed to cloud trends "can often get crowded and volatile," business dynamics elsewhere in the semiconductor sector are murkier.
Although Arya's model calls for a rebound scenario, he also identified some names that could work against a more "recessionary" backdrop. Those include Cadence Design Systems Inc. $(CDNS)$, Synopsys Inc. $(SNPS)$ and Broadcom, which have a history of outperformance.
Meanwhile, in the case of a "resurgence scenario and potential high-beta rally," he thinks shares of Arm Holdings PLC $(ARM)$, Micron Technology Inc. $(MU)$ and ON Semiconductor Corp. $(ON)$ could be standouts.