Morgan Stanley just named its 3 favorite chip stocks after hosting a big tech conference

Published Mon, Mar 11 202412:15 PM EDTUpdated Mon, Mar 11 20241:31 PM EDT

Morgan Stanley's recent Technology, Media & Telecom conference reinforced investors' high hopes for artificial intelligence as a catalyst for the industry, even as some parts of the industry weather a correction. "Overall our TMT conference reinforced that industry conditions are in a bottoming process — albeit one that is out of phase across different end markets," analysts led by Joseph Moore wrote in a Sunday report to clients. "We continue to be positive on the group, and we want some AI exposure and some cyclical exposure." Moore named Nvidia , Western Digital and Microchip Technology as the investment bank's favorite names coming out of the conference. Computer drive maker Western Digital is the firm's top pick. Moore noted that WDC raised its revenue and earnings guidance at the conference, and said the company's NAND business will retain its "significant value proposition" given that the CEO will remain with that side of the company. Western Digital announced in late October that it will split its hard disk drive and NAND memory businesses into two separate public companies. NAND flash memory is a type of nonvolatile storage technology that can store data without power . Moore foresees strong NAND fundamentals in the first half of 2024 and a potential modest fade in the second half of the year, before a "return to peak earnings power in CY25." "Every semiconductor equipment company that we talked to highlighted that NAND spending will remain at minimal levels through CY24, even as DRAM spending and cutting edge fab spending hit new highs," he said. "The picture could not be clearer — the enthusiasm for AI is drawing DRAM spending towards the siren song of high bandwidth memory, drawing away NAND spending and setting us up for a multiyear upturn in that space." Western Digital shares are up 17.9% so far this year. With Nvidia, Moore thinks the rally in all stocks exposed to AI leaves it a "likely outperformer." Rack space and power, rather than graphics processing unit shortage, are leading to the stock's bottleneck to adding further AI capacity, the analyst said. He still believes the company is in a "good place relative to that concern," however. Nvidia shares have soared more than 75% year to date, but fears about the concentrated AI-fueled rally have accumulated, leading the stock to stall on Friday and Monday. Microchip is another one of Morgan Stanley's picks following the tech conference. Moore noted that the company's February bookings rose from January, and that Microchip reiterated its guidance for the current quarter. Shares of Microchip are down 0.4% to start the new year, but are up almost 7% this month. Analysts' consensus rating on MCHP is overweight, with an average price target approaching $93 a share, which suggests a 4% decline from the stock's latest close, according to FactSet. "As a core investment concept, we want to buy semiconductor stocks when they are materially undershipping end demand, all else being equal, and with revenues down nearly 40% from peak we think that's the case here," Moore said about Microchip. "That would make this the most severe inventory correction of all time, and when that bottoms out we should see a nice recovery in 2h."