Morgan Stanley has changed its top chip pick from Nvidia Corp. to a more unexpected name in the sector. Western Digital’s Corp, which produces data-storage devices, has become the new favorite of Morgan Stanley analyst Joseph Moore, who demoted Nvidia to the second spot.
The Valuation Gap Between Western Digital’s and Its Peers: Morgan Stanley’s View
Moore is not focusing on the popular theme of artificial intelligence in chips, but rather on the attractive opportunity for Western Digital shares to rise more than 25%. He argues that the company’s valuation is significantly lower than its peers, and that a planned split of its memory and hard-drive businesses by the end of the year will create value for shareholders.
The Benefits of Separating the Memory and Hard-Drive Businesses: Western Digital’s Strategy
Moore wrote in a note on Monday that the market seemed to prefer merger scenarios, but the separation decision “actually makes the story much simpler.” He also pointed out the positive trends in NAND memory prices, which he said were up more than 20% sequentially in the first quarter and even more in some segments. He said that this implied that the company was already at midcycle gross margins in the March quarter, unlike other memory players.
The Positive Trends in NAND Memory Prices: Western Digital’s Advantage
Moore admitted that he had a “somewhat ambivalent” outlook on the longer-term NAND cycle, as he noted that “fab utilization is very low and will increase soon.” He said that this was “negative for economics,” but he also observed that there were few new entrants in the NAND market lately.
The Challenges of the Longer-Term NAND Cycle: Western Digital’s Risk
He raised his price target for the stock from $52 to $73, which implies a 27% upside from Monday’s midday levels. The stock was up 5.2% at the last check on Monday.
Why Nvidia is Still a Strong Second Choice: Morgan Stanley’s Opinion
Moore still likes Nvidia’s stock, which he ranks as his top choice among compute names, but he acknowledged the strong rally in the stock market for the graphics processing unit maker in the last month: It has increased 22%. He said that “all the AI stocks have gone up, and with the possibility of AI coming off allocation in the second half of 2024, there could be some challenges to consider.”
He added that “Nvidia has gone up less than other companies in the AI supply chain while maintaining the leading position and has significant upside for at least the next few quarters, and key products such as H200 and B100 should boost investor confidence in the company’s market dominance.”