Semiconductor sector surged 155%, so why does Bernstein say NVDA and AVGO are still too cheap?

Original Author: Rita

Introduction

Bernstein released its semiconductor industry quarterly review on June 23. Core view: AI has become the "only game in town" for the semiconductor sector, with strong fundamentals, but valuations and crowding levels are at historical highs. The report recommends both NVDA and AVGO (rated "Outperform"), arguing that although they have lagged relative performance this year, they are the core beneficiaries of the AI supply chain and their current valuations are "absurdly cheap." AMD was upgraded, but caution remains 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 is up 106.6% year-to-date. Over the same period, the S&P 500 has only risen 9.2%. The premium of SOX over the S&P 500 has reached 62%.

This rally is driven by fundamentals, not a bubble. Bernstein's data shows that the forward EPS for SOX has increased by 75% from the beginning of the year to now, while valuation expansion accounts 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%, CPUs and optical solutions each rose 220%, while GPUs and ASICs only climbed 115%. The entire AI supply chain is profitable, but the profitable segments and the degree 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, with relatively tight supply. GPUs only rose 115%, despite NVDA holding the vast majority of the AI chip market share.

Actual Purchasing Power Under High Valuations

The forward P/E ratio for SOX is currently 34.1x, while the S&P 500 is at 21.0x, a premium of 62%. This sounds expensive, but it depends on the specific companies. NVDA's adjusted EPS forecast 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 a specific term: "absurdly cheap."

His reasoning is straightforward: NVDA's Blackwell chip series is expected to reach a revenue scale of $1 trillion by 2027. The situation is similar for AVGO, with a target price of $550, but if its AI-related revenue reaches $100 billion by 2030, the current valuation looks quite cheap.

This is why Bernstein rates both companies as "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 is at 30x, while NVDA is at 25x. Considering the continuity of the Blackwell and Rubin product generations, and AVGO's monopoly position in switch chips, these valuation discounts seem extremely unreasonable. The market is ignoring a core fact: without chips from NVDA and AVGO, the entire AI infrastructure cannot function.

CPU's Dual Narrative, QCOM's Singular Dilemma

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

QCOM, on the other hand, is caught in a singular dilemma. Smartphone shipments declined 3% year-over-year in Q1 2026. The rise in memory chip prices means higher costs for phones, which is negative for the pricing power of chipset suppliers. Bernstein admits its previous downgrade of QCOM was a "bad decision" but maintains its "Market Perform" rating. The problem is that weakness in consumer electronics seems certain, and QCOM struggles to find new growth engines. Even if future Analyst Days can tell a new data center story, compared to AMD's dual drivers and the structural position of chip manufacturers, QCOM's narrative lacks persuasiveness.

Practical Considerations for Sub-Sectors

Semiconductor equipment (AMAT, LRCX, KLAC) continues to be viewed favorably. Demand for capacity construction remains strong. All three companies 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. However, their data center business still accounts for a very small portion, around 10%. The P/E ratios for TXN and ADI are in the 30-40x range, 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 crowding level in the semiconductor sector is at historical highs. Inventory days are rising again, well above 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 there are any signs of weakness in downstream demand, the entire supply chain will face pressure for proactive inventory reduction. PC and consumer segments are already showing weakness, and mobile phones are declining year-over-year. Once inventory pressure spreads to data center procurement, the threat of a price war becomes real. At that point, the pricing power of companies close to the bottleneck (NVDA, AVGO) could be severely weakened.

The strength of AI demand is undeniable, but the current high valuations of the semiconductor sector have already priced in this good news. While NVDA and AVGO appear relatively cheap, this premise relies on believing they can meet analysts' targets. AMD's story is attractive, but execution risks exist. QCOM has become a forgotten player, lacking clear catalysts. Bernstein's stance is selectively bullish. At this point, stock selection has become more important than correctly forecasting the direction of the market.