Is NVIDIA no longer the "chip leader"? Morgan Stanley's TOP1 has become Western Digital

Despite the continuous popularity of AI chips and NVIDIA being the "hot cake" in everyone's eyes, Morgan Stanley has now elevated Western Digital to its top recommended stock and downgraded NVIDIA to second place.

Recently, with the booming demand for AI chips, the US chip stock index has reached record highs. However, Morgan Stanley analyst Joseph Moore did not follow the trend. Instead, he turned his attention to storage chip manufacturer Western Digital.

Moore believes that the spin-off of Western Digital's business potential combined with the recovery of the storage market gives the stock a 28% upside potential and an "extremely attractive" valuation gap compared to other companies in the same industry.

Spin-off imminent, helping to further unlock business potential

Moore pointed out in a report on Monday that the spin-off will help further unlock business potential:

Although the market seems to favor consolidation plans, Western Digital's decision to separate its hard drive and flash memory businesses by the end of the year actually simplifies the situation.

Since 2022, Western Digital's performance has been severely affected due to a sharp decline in market demand and an oversupply of storage chips. Last year, the merger plan between Japan's Kamen Rider Project and Western Digital's business was "aborted" due to opposition from SK Hynix.

Subsequently, Western Digital announced the spin-off into two companies, each producing hard drives and flash memory, with the spin-off of the NAND Flash memory division expected to be completed this year and listed independently in the second half of 2024.

Western Digital stated that the separation of these two businesses will unlock significant value for Western Digital shareholders, allowing them to share the advantages of two industry leaders with unique growth and investment conditions.

Recovery of the storage market brings tailwinds to performance

Western Digital holds a 15% global market share in flash memory chips, which has gradually become its main business. The spin-off will facilitate independent operations.

Moore also pointed out signs of a recovery in the flash memory market:

We have seen flash memory prices rise by more than 20% in the first quarter, with even greater increases in some regions. Considering that Western Digital's gross margin was already positive in the December quarter last year, its gross margin in the March quarter this year should be at a mid-cycle level, which is in sharp contrast to the performance of its peers.Moore's view on the long-term flash memory cycle is "mixed". He believes that the current trend is unfavorable to the economy because the utilization rate of wafer fabs is quite low, but it will soon rise. However, he also pointed out that the number of new companies entering the flash memory market recently is limited.

Overall, Moore has raised the target price of Western Digital to $73, which represents a 28% upside from Monday's closing level. This adjustment reflects Moore's optimistic expectations for the future development of Western Digital.

Nevertheless, Moore remains bullish on NVIDIA. He still believes that NVIDIA has a leading position in the computer sector and has noticed that the company's stock price has rebounded strongly by 22% in the past month. Moore stated:

All AI stocks are rising, and there is a possibility that this sector will continue to rise. However, there may be some unfavorable factors to consider in the second half of 2024, which could lead to a reduction in allocation.

Although NVIDIA's increase in the AI supply chain is lower than other companies, it still maintains a leading position and does have substantial upside potential in the coming quarters.