Semiconductor sector surges 155%: why Bernstein says NVDA and AVGO are still too cheap?

Original Author: Rita

Introduction

Bernstein released its quarterly overview of the semiconductor industry on June 23. The core view: AI has become the "only game in town" for the semiconductor sector, with strong fundamentals, but valuations and crowding are at historical highs. The report also recommends NVDA and AVGO (rated "Outperform"), believing that while they have underperformed relatively this year, they are the core beneficiaries in the AI supply chain, and their current valuations are "ridiculously cheap." AMD has been upgraded, but the firm remains cautious on QCOM due to pressure on its mobile phone business.

AI Demand Drives Record Semiconductor Sector Gains

The Philadelphia Semiconductor Index (SOX) has risen 155.6% over the past year and 106.6% year-to-date. Over the same period, the S&P 500 has only gained 9.2%. The SOX's premium over the S&P 500 has reached 62%.

This rally is driven by fundamentals, not a bubble. Bernstein's data shows that the SOX's forward EPS has increased by 75% from the beginning of the year, with valuation expansion accounting for only a small part.

The divergence within the semiconductor sector has reached an extreme level. From the start of the year to June 22, memory chips surged 500%, CPU and optical solutions each rose 220%, while GPU and ASIC only increased by 115%. The entire AI supply chain is profitable, but the segments and extent of profitability are uneven. The furthest upstream and downstream parts of the supply chain benefit the most; building new production lines requires memory and semiconductor equipment, and supply is relatively tight. GPUs only rose 115%, despite NVDA holding the vast majority of the AI chip market share.

Actual Purchasing Power Under High Valuations

The SOX's forward P/E ratio is now 34.1x, while the S&P 500's is 21.0x, a premium of 62%. This sounds expensive, but it depends on the specific company. For NVDA, the adjusted EPS estimate for 2026 is $9.19, and for 2027 it is $12.52. Based on Bernstein's target price of $315, the 2027 P/E is 25x, compared to the entire sector's forward P/E of 34x. NVDA is not the most expensive; it is relatively cheap.

Bernstein analyst Stacy Rasgon used one word: "ridiculously cheap."

His reasoning is straightforward: NVDA's Blackwell chip series could potentially reach a revenue scale of $1 trillion by 2027. The situation is similar for AVGO; with a target price of $550, if it achieves its goal of $100 billion in AI-related revenue by 2030, the current valuation looks cheap.

This is why Bernstein rates both companies "Outperform." Although they have lagged this year, they are the most critical links in the AI demand chain. For comparison, Apple's forward P/E is around 28x, Microsoft's is around 30x, while NVDA's is at 25x. Considering the continuity of the Blackwell and Rubin product generations, and AVGO's monopoly position in switching chips, these valuation discounts appear extremely unreasonable. The market is overlooking a core fact: without chips from NVDA and AVGO, the entire AI infrastructure cannot function.

CPU's Dual Narrative, QCOM's Single Predicament

AMD was recently upgraded by Bernstein to "Outperform." Why the upgrade? Because AMD has opportunities not only in AI/GPUs but also in the proxy AI trend for CPUs. CPU shipments began to improve quarter-over-quarter in Q1 2026, slightly outpacing PC shipments. Bernstein believes AMD's fundamentals are sufficient to support earnings per share of $20 by 2028, and the current stock price still has upside relative to this target.

QCOM, however, is stuck in a single predicament. Smartphone shipments declined 3% year-over-year in Q1 2026, and rising memory chip prices mean higher handset costs, negatively impacting pricing power for chipset suppliers. Bernstein admits that downgrading QCOM earlier was a "bad decision," but maintains a "Market Perform" rating. The issue is that weakness in consumer electronics seems inevitable, making it difficult for QCOM to find new growth engines. Even if future Analyst Day presentations introduce a new data center narrative, QCOM's story is less compelling compared to AMD's dual drivers and the structural positions of chipmakers.

Realistic Considerations for Sub-Sectors

Semiconductor equipment companies (AMAT, LRCX, KLAC) continue to be viewed favorably, as the demand for capacity expansion remains strong. All three are rated "Outperform," with target price upside ranging from 30% to 70%.

The situation for analog chips (ADI, TXN) is more complex. They are indeed in a recovery cycle, achieving double-digit growth for over a year straight. However, their data center business exposure remains relatively small, at around 10%. TXN and ADI trade at P/E ratios of 30 to 40 times, appearing quite expensive. Bernstein rates both as "Market Perform," choosing to wait and see.

Two Risks: Crowding and Inventory

Bernstein's industry sentiment indicator shows that the level of crowding in the semiconductor sector is at historical highs. Inventory days have risen again, far exceeding the upper limit of the historical normal range. While channel inventory has decreased somewhat, it remains above average. What does this mean? It means that if any signs of weakness appear in downstream demand, the entire supply chain will face pressure for active inventory destocking. The PC and consumer end-markets are already showing weakness, and mobile phones are declining year-over-year. Once inventory pressure spreads to data center procurement, the threat of price wars becomes real. In this scenario, the pricing power of companies close to bottlenecks (NVDA, AVGO) would be severely weakened.

The strength of AI demand is undeniable, but the current high valuations in the semiconductor sector have already priced in this good news. NVDA and AVGO are relatively cheap, but this is conditional on believing they can achieve their analyst targets. AMD's story is compelling, but execution risks exist. QCOM has become the forgotten player, lacking clear catalysts. Bernstein's stance is selectively bullish; at this point, stock selection has become more important than betting on the overall direction.