Shares of Nvidia (Nasdaq: NVDA) are taking a beating, but it’s not justified. Wall Street analysts want you to sell your winners and buy losers.
- I recommend you don’t do it.
On Monday, analysts at Evercore ISI recommended investors shift money away from tech high-fliers and invest the proceeds in Micron (Nasdaq: MU), an Idaho-based memory-chip maker.
The concept is sound … if you believe all semiconductors are essentially the same.
However, they are not … yet that reality does not stop analysts from playing rotation roulette.
C. J. Muse, an Evercore semiconductor analyst, says that Micron is “structurally undervalued” based on channel checks for sales and inventory.
Related Post: How Nvidia Is Leading the EV Revolution
This is important because Muse is admitting what has become abundantly clear since the rise of the personal computer: Memory chips are a commodity. Their value is more about simple supply and demand than innovation.
Micron shares reflect this reality. The stock has been up and down with the cyclicality of dynamic random-access memory (DRAM) pricing.
When the economy is hot and demand for computing devices is high, prices rise. When suppliers build new capacity to meet that demand, prices fall. It is the reason I do not recommend DRAM companies.
- Nvidia is on the other end of the spectrum.
The company, based in San Jose, California, is constantly innovating; its chips — now the brains behind the most complicated artificial intelligence (AI) and machine learning (ML) — are mostly without rival.
Nvidia also owns the software platform that third-party developers use to build the software simulations and the algorithms behind self-driving cars, material science and biotechnology breakthroughs. It is a complete ecosystem. There is no commodification.
The analysts are likely wrong: Trading Nvidia for Micron is not smart, even if the latter outperforms in the near term … that is clearly the gamble.
Getting clients in and out of stocks at the right time is the value-added part of big investment research, or so the analysts would have us believe.
- Reality is quite different.
With shares down 20% to $75 in August, Evercore International Strategy & Investment (ISI) reiterated a “Buy” recommendation for Micron while simultaneously lowering the price target to $100 from $135 and removing the stock from the firm’s Top Picks list.
At the time, Muse said the outlook for DRAM pricing should decline into the fourth quarter and that it was “very difficult to own memory names when pricing is inflecting lower.”
When Nvidia reported third-quarter financial results in November, sales surged to $7.1 billion, up 50% year over year. Data-center chip sales zoomed 55%, and executives guided fourth quarter results higher.
Related Post: Rotating Back to Tech
The stock has been a big winner for a long time. The secret is innovation. Executives have made a problem-solving part of the business model. They find computing problems like AI, materials science and drug development … then build the chips and software frameworks to solve the issues.
Even with the drop on Monday, the stock is up a whopping 115.7% in 2021.
A Lot to Love
Gross margins are 64%, with net profit margins in the 34% range. The company earned $9.7 billion in profits on only $24.2 billion in sales.
And both the top and bottom lines are accelerating as enterprising businesses race to find more use cases for Nvidia’s cutting-edge chips.
Micron should probably sell more cheaply than Nvidia: Its prospects are worse … its business model isn’t as finely tuned … and its executive team is less innovative.
Don’t get sucked into the analyst value trap of selling winners and buying losers. Losers always looks cheaper. It’s not a bug. It’s a feature.
- Like always, focus on digital transformation winners.
And one way to do so is with my Weiss Technology Portfolio service, where subscribers are currently sitting on big open gains of 474%, 401% and 397%.
If you’d like to learn more, click here now.
Best wishes,
Jon D. Markman
