By Wallace Witkowski, MarketWatch
Chip stock gains have outpaced the broader market for well more than a year, but now that they’re plummeting along with everything else amid fears about COVID-19, a Morgan Stanley analyst released a potential shopping list for the sector Thursday.
In a Thursday note, Morgan Stanley analyst Joseph Moore said that in the chip space, “indiscriminate selling should create some opportunities when the dust settles.” Moore has an in-line rating on the sector.
“Broadly speaking, stocks have not come down enough to suggest an overweight position in the group in the face of material concerns of disruption of both demand and supply as coronavirus goes global,” Moore said. “While it’s possible that stocks could be approaching oversold conditions near term, we would not equate that with being cheap.”
For a little perspective, the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX +2.75% is down nearly 25% for the year, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.61% is down 23% and the tech heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.87% is down 20%. When we go back 12 months, however, the SOX index is still up 2.7%, while the S&P 500 is down 11% and the Nasdaq is down 5%.
For more: Chip stocks roared even as sales slumped in 2019
That said, what does Moore like? Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +1.25% , for one. The analyst cited data-center strength continuing, new AI applications, and new products this year as catalysts.
“For larger-cap growth with the best chance of powering through tough conditions, we favor Nvidia,” Moore said. Nvidia shares are down 8% on the year, but up 33% over the past 12 months.
For a value play, Moore favors Western Digital Corp. /zigman2/quotes/204213617/composite WDC +0.39% , which he said “offers the most upside from a potential macro recovery.” Western Digital shares are down 38% on the year, and down 20% over the past 12 months.
In small-cap names, Morgan Stanley likes Ambarella Inc. /zigman2/quotes/207997433/composite AMBA +4.76% on the belief that “the stock is being punished by the market more than we think the fundamentals justify, even if we assume the potential worst around the COVID-19 impact.” Ambarella shares are off 35% on the year, and down 10% over the past 12 months.
Morgan Stanley sees Broadcom Inc. /zigman2/quotes/200646538/composite AVGO +2.94% as “offering the best risk/reward in our coverage, having overshot our bear case valuation this week as the selloff in the market accelerated.” Broadcom shares are off 31% for the year, and down 19% over the past 12 months. Broadcom’s stock fell under pressure after hours Thursday after the company pulled its revenue guidance for the year.
NXP Semiconductors NV /zigman2/quotes/202999625/composite NXPI +3.48% is “one of a few stocks trading meaningfully below its historic multiples, offering value relative to the group and broader market,” Morgan Stanley’s Moore said. NXP shares are off 28% for the year, and down 2.2% over the past 12 months.
Likewise, Morgan Stanley said Amphenol Corp. /zigman2/quotes/207999687/composite APH +2.39% is now at a discount while most chip stocks are trading at three- to five-year valuation multiples, and Cree Inc. /zigman2/quotes/204547734/composite CREE +4.07% shares are a top pick for growth investors because the company is “an integral part of the Electric Vehicle supply chain.” Amphenol shares are down 31% on the year, and down 20% over the past 12 months, while Cree shares are down 37% for the year, and down 46% over the past 12 months.