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MS: The next move in tech hangs on NVDA - what are the bull and bear scenarios?

Published 21/05/2024, 06:50 pm
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Nvidia (NASDAQ:NVDA) is due to report its fiscal Q1 2025 earnings following the closing bell on Wednesday, with investors largely expecting yet another strong display from the AI chip titan.

However, the more earnings continue to soar, the more investor concerns are mounting. Specifically, the ongoing unprecedented AI rally, now facing a $2.3 trillion test, has led many to question when AI earnings might level off.

According to Morgan Stanley (NYSE:MS) analysts, determining where Nvidia’s earnings might peak remains a challenging task. However, with hyperscalers discussing increased long-term spending expectations for AI, the outlook appears more positive in the long run, they noted.

Despite this, there is anxiety about a potential "air pocket" by year-end due to the upcoming Blackwell product transition.

“We can't rule out such a pause, but for now our checks continue to point to strong steady growth, even as we transition to Blackwell,” analysts said in a Monday note.

Morgan Stanley cautions that the next move for the technology sector hinges on Nvidia.

More concretely, they said a significant run-up into this earnings season for AI stocks and a strong quarterly performance could lead to stocks consolidating gains. With an average price rally of 27% year-to-date for this AI group, the Nvidia earnings release could be a volatile event with a positive skew to their base case, analysts said.

In their bull case, Nvidia's revenue exceeding consensus could lead to a 3-15% price upside, with Innolight and FII as key tactical picks. On the other hand, in their bear case, the group could see a 5-10% downside, with the order of preference reversed.

“The market for AI chips remains strong if we triangulate strong supply chain checks with strong purchasing and higher cloud capex,” analysts wrote.

“For earnings, the recovery is playing out for AI stocks in Asia – and if validated by NVIDIA's outlook, these stocks remain cheap and will continue to outperform, in our view,” they continued.

From a broader perspective, the Wall Street giant said it is most constructive on companies involved in GPU, HBM, custom chip design, manufacturing, testing, and rail kits. As such, analysts’ top individual stock preferences include Nvidia, SK Hynix, DISCO, Advantest, KYEC, TSMC, Wistron, Hon Hai, FII, King Slide, and Innolight.

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