Morgan Stanley's New Top Chip Recommendation

Morgan Stanley analyst Joseph Moore has made a significant change to his top chip pick, looking beyond Nvidia Corp. and turning to Western Digital Corp. Instead. With this move, Western Digital's stock has gained the position of Moore's No. 1 recommendation, while Nvidia's stock has been pushed down to second place.

While the current buzz surrounding chips revolves around artificial intelligence (AI), Moore is not emphasizing AI as much as he is highlighting the potential for over 25% growth in Western Digital's shares. As a manufacturer of computer data-storage products, Western Digital stands out to Moore due to what he describes as an "extremely compelling" valuation gap between Western Digital and its competitors. Moreover, he is optimistic about the value that investors can gain from the upcoming separation of the memory- and hard-drive chip company.

According to Moore, the decision to separate these assets towards the end of the year simplifies the company's story. In a note to clients on Monday, he stated, "While the market appeared to favor consolidation scenarios, the decision to separate the hard-disk-drive and memory assets towards the end of the year actually simplifies the story completely."

It's clear that Morgan Stanley's shift in focus from Nvidia to Western Digital reflects their confidence in Western Digital's growth potential and their belief in its ability to deliver value to investors.

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Nvidia's stock has been on an impressive upward trajectory, and industry expert Moore believes that this upward trend will continue. However, he does caution that the strong rally in the stock market may present some challenges for Nvidia moving forward.

Moore acknowledges the positive prospects for AI stocks, but anticipates potential headwinds as AI allocations may decrease in the second half of 2024. Despite this, he highlights Nvidia's resilience and solid market position compared to other companies in the AI supply chain. In fact, he considers Nvidia to be his top pick among compute names.

It's worth noting that Moore's optimism is backed by his observation that Nvidia has rallied less than its competitors, indicating room for further growth. Furthermore, the company's key products, namely the H200 and B100, are expected to contribute to its market leadership.

As a result of his positive outlook, Moore has raised his price target for Nvidia's stock to $73 from $52, signaling a potential 27% increase from its current levels.

In conclusion, while Moore acknowledges some potential challenges ahead, he remains bullish on Nvidia's stock for the next few quarters and emphasizes the company's market leadership in the AI space. Investors can potentially find comfort and upside in Nvidia's stock as it continues to cement its position as a frontrunner in the industry.