Chipmakers reach new highs: How investors should capitalize

AI-based tech stocks have seen an unprecedented rally in US markets, with Nvidia (NVDA) leading the charge. While some fear that what goes up must come down, other investors believe these stocks still have room to grow.

Mizuho Americas Desk Based Analyst Jordan Klein and KeyBanc Capital Markets Equity Research Analyst John Vinh join Yahoo Finance to discuss how far the momentum can go and which names are best positioned to outperform the broader trend.

Vinh explains that while companies such as Marvell Technology (MRVL) and Broadcom (AVGO) recorded increases from AI-related businesses, the gains did not compensate for worse-than-expected performance in other domains: "Both Marvell and Broadcom reported overnight... their AI businesses grew well over 100% for each of those companies but obviously in the near term we are going through kind of a broader inventory correction, particularly on enterprise, seeing some de-stocking activity there. So obviously in the near term it's obviously not enough to offset some of those sort of headwinds, but I think longer term I think if you are an AI bull we certainly still have conviction in the longer term stories related to these AI names.

As investor sentiment on semiconductors begins to resemble a frenzy, Klein relays some of his uneasiness regarding the momentous tech rally: "I'm uneasy just because of the way the stocks are trading. I'm not uneasy at all about the fundamentals, what some of these companies are saying and doing particularly Nvidia and AMD (AMD) and Broadcom and Marvell or the memory companies or semi-cap equipment. I think there is a real long runway for further growth and upside, but I'm always fearful when you get this fear of missing out kind of chase mentality amongst investors."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: The semiconductor space is on a tear. And it's largely thanks to AI enthusiasm with several names hitting record highs at yesterday's close. We're looking at how far the momentum can go and which names are best positioned to outperform the broader trend.

Let's bring in Jordan Klein, Mizuho Americas Desk Based Analyst and John Vinh KeyBanc Capital Markets Equity Research Analyst. Thanks you guys for being here. Really appreciate it.

John, I want to start with you. Because we heard from a couple of companies in the last 12 hours that had an increase from AI-related businesses. But it didn't make up for maybe worse than expected performance in the rest of their business.

I'm talking about Marvell and Broadcom, of course. What does this tell us about the bigger thesis on AI, John, do you think?

JOHN VINH: I think the larger thesis is still kind of playing out. Like both Marvell and Broadcom reported overnight. And I think you're referring to them.

Their AI businesses grew well over 100% for each of those companies. But obviously, in the near term, we are going through a broader inventory correction, particularly on enterprise. We're obviously seeing some destocking activity there.

So, obviously, in the near term, it's obviously not enough to offset some of those sort of headwinds. But I think longer-term, I think if you're an AI bull, we certainly still have conviction in the longer-term stories related to these AI names.

JOSH LIPTON: And, Jordan, I want to bring you in here on that. And that same theme. You know, it's interesting, Jordan, with AI.

Obviously, a lot of excitement about it. And people talk about it, Jordan, as a real paradigm shift. Internet, mobile, and now AI.

It also does, Jordan, you just look at these moves. And they are extraordinary. We do seem to be pricing in just a lot of good news, Jordan.

JORDAN KLEIN: Well, I would agree. I mean, it's rare when you see stocks up 80% in the first two months of the year. But I think we have never really seen a kind of investment wave this aggressive across such a large swath of buyers.

It doesn't happen very often. And when it does, like you saw in internet and cloud, the Semis are usually the first to see it. So I think what a combination of investors chasing performance in beta, a lot of the initial spend is centered early days on the silicon or the semi-companies.

And they're the clear winners. While other parts of the market, they're talking a big game in AI, and they're talking about new offerings and products. But it's not going to really move their income statement or revenue nearly as quickly as some of the areas in Semis.

But I would say this. A lot is priced in. But remember, Semis historically trade very forward-looking.

So people buy and sell Semis on what they think will happen probably six to eight months from now. And that's why people are so bullish.

JULIE HYMAN: Just a follow up on this. I mean, your note on all of this really struck me, because you really seem uneasy with the rally that we have seen, the valuations that we are seeing. And yet you still say this is a group you like.

So how are you reconciling that? And what would be the signs that you would go from being uneasy to saying pausing on buying?

JORDAN KLEIN: Well, I'm uneasy just because of the way these stocks are trading. I'm not uneasy at all about the fundamentals, what some of these companies are saying and doing particularly in NVIDIA, and AMD, and Broadcom, and Marvell, or the memory companies or semi-cap equipment, I think. There's a real long runway for further growth and upside.

But I'm always fearful when you get this fear of missing out kind of chase mentality amongst investors. So I talk to only institutional investors' money managers mutual funds, hedge funds. And they're not nearly as excited and bold up as these stock prices suggest. Meaning I think that's a lot of Quant passive momentum type trading dynamics, as well as retail investors.

So I think it's actually a good thing when you see a Marvell or a Broadcom down today despite the-- because their reports were, I guess, kind of mixed to disappointing. If they were trading up, and when earlier in the day, you saw AMD up 7%, and NVIDIA up 5%, I thought that just was unhealthy behavior.

Now, I think it's actually more rational to see these stocks pulling back, taking a breather. And I think that's kind of what we need a little bit of a near-term pause so we can catch our breath without just going straight up day after day.