'Even if Nvidia has been a powerful motor propelling equity markets this year, there are plenty of other oars in the water doing the same thing,' an analyst says
Nvidia Corp. dominated the technology sector for much of this year. But it turns out the sector doesn't need it to survive.
Shares of Nvidia $(NVDA)$ are in correction territory, down more than 10% from their latest bull-market peak, and they've lost 5.4% across the three most recent trading sessions. Meanwhile, the Nasdaq Composite Index COMP has held its own, up 1% across the past three sessions and registering gains in two of them. And the PHLX Semiconductor Index SOX saw its best two-day run in three months across Friday and Monday, buoyed by Broadcom Inc.'s $(AVGO)$ earnings commentary.
The discrepancy reflects how the artificial-intelligence trade is alive and well, just broadening out beyond Nvidia. If investors were worried about the near-term health of AI spending, that likely would weigh on the tech sector as a whole. Instead, Wall Street has fresh confidence in the AI boom, glimpsing a wider slate of companies poised to benefit.
Investors aren't rotating out of technology, or even semiconductors. They spent Friday and Monday pouring fresh money into shares of Broadcom and Marvell Technology Inc. $(MRVL)$ - two makers of application-specific integrated circuits that could prove the next leg of AI chip growth - as well as shares of Micron Technology Inc. $(MU)$.
The moves seemed logical, Mizuho desk-based analyst Jordan Klein wrote last week following Broadcom's earnings report, which brought with it the projection of a $60 billion to $90 billion serviceable addressable market in semiconductors by 2027, with room for upside to that figure.
He thought investors might sell some Nvidia stock while adding to their Broadcom positions, especially as some hedge fund managers had gotten short on Broadcom's stock ahead of earnings while thinking that Nvidia and Marvell were better ways to play current AI trends. Long-only mutual funds were also probably underweight Broadcom, he added.
"Many will need to play catch up on a 15-20% one-day rip," Klein wrote midday on Friday, before Broadcom shares were on to close 24% higher on the day. Further, he noted that those fund managers might be concerned about a "sustained run higher" into the early part of next year.
Broadcom now seems like a "must-own" play, in his view, with the company's longer-term story compelling. "CEO Hock Tan set up the next 12 months extremely well," he wrote, but the years beyond that promise even more opportunity to capture AI spending from a likely growing stable of big customers.
There's also an Nvidia tie-in, with "investors worrying about Broadcom-based XPUs capturing market share from Nvidia GPUs as hyperscalers build out their data centers with proprietary chips," according to Daniel O'Regan, Mizuho's managing director of equity trading. He referred to graphics processing units as well as Broadcom's XPU AI accelerators.
As for Marvell, the stock was more loved ahead of the Broadcom report, but Klein said the stock looked better after Broadcom's commentary. The company also plays into custom silicon, the technology underpinning Broadcom's sizable market projection.
Nicholas Colas, the co-founder of DataTrek Research, noted that Nvidia shed $413 billion in market cap since its Nov. 7 high. But Broadcom added $302 billion over that span, while Marvell tacked on another $27 billion.
"Even if Nvidia has been a powerful motor propelling equity markets this year, there are plenty of other oars in the water doing the same thing," Colas wrote. "They may not be as noticeable, but they continue to get the job done."
Meanwhile, Micron's story is mixed, but Klein noted highly negative sentiment that could have prompted some short covering as bearish investors feared the sort of surge that Broadcom shares saw.
The resilience of large-cap technology and the Invesco QQQ Trust QQQ in the face of Nvidia's weakness is "a very reassuring sign that investor confidence is bigger than just one stock," Colas noted.