With the financial report approaching and the stock price roller coaster, why does Morgan Stanley remain bullish on NVIDIA?

In this wave of sell-offs in US tech stocks, NVIDIA, as the leader in GPUs, has also experienced a significant pullback. The stock price this week has been like a roller coaster, with a 7% drop on Tuesday, followed by a nearly 13% surge on Wednesday, and then another 6% drop on Thursday... The stock price has fallen by over 19% since its peak in July.

Morgan Stanley is optimistic about NVIDIA despite its recent decline in stock price. On July 31st, they released a research report bullish on NVIDIA, pointing out that due to the strong sales of NVIDIA's current chip products, bright prospects for new products in the future, and the negative impacts of market overestimation of industry competition fading over time, the current pullback in NVIDIA's stock price provides a good entry point. They still strongly believe in NVIDIA's future stock performance and maintain a "overweight" rating. As a result of this news, NVIDIA's stock price surged by nearly 13% at the close on Wednesday.

So why does Morgan Stanley continue to be bullish on NVIDIA?

Because Morgan Stanley believes that the market's current concerns about NVIDIA mainly focus on excessive capital expenditure in the AI industry and intense industry competition, but these negative impacts will weaken over time, as NVIDIA's GPU product advantages remain.

Reasons why Morgan Stanley is bullish on NVIDIA:

1. The future demand for NVIDIA's GPU products will gradually shift from Hopper to Blackwell, and during the transition period, the sales of H100 and H200 GPU products based on the Hopper architecture remain strong, supporting NVIDIA's revenue.

It is clear that the Hopper architecture GPU products are at the end of their cycle, and as technology advances and products are updated, market demand will shift from products based on the Hopper architecture to the next generation Blackwell architecture products.

With the shift in product demand, supply chain constraints will also change: it may shift from GPU capacity shortages to silicon material supply shortages (i.e., raw material supply may become a new bottleneck).

1. The enthusiasm of large tech companies for NVIDIA's new Blackwell architecture GPU products continues to rise, making NVIDIA's future revenue prospects clearer.

NVIDIA's Blackwell new products offer a significant improvement in inference performance compared to previous generation products, increasing attractiveness to customers.

Despite the complexity of Blackwell and combination rack, which may pose challenges to the supply volume, NVIDIA's progress in capacity expansion seems to be proceeding smoothly.

We expect that by October, the shipment volume of the first batch of Blackwell products will be considerable, but by early 2025, Hopper architecture GPU products will still be NVIDIA's main source of revenue.

Morgan Stanley: The recent decline in NVIDIA's stock price may be related to the following major risks, but there is no need to worry too much!

Morgan Stanley is very optimistic about NVIDIA and points out that the recent decline in NVIDIA's stock price may be related to the following major risks, but the negative impacts of these risks will weaken over time The First Major Risk: Technology giants significantly increase AI capital expenditures, but fail to recoup corresponding investment returns from AI investments

We have seen AI capital expenditures rising everywhere, but Wall Street is not satisfied with the significant increase in AI quarterly capital expenditures by these technology giants, triggering recent selling of US tech stocks by investors.

However, it is important to understand that large technology companies are facing various constraints such as land and power grid limitations in increasing AI investments, making capital expenditures non-linear.

Our research generally shows that technology companies are eager to deploy GPUs quickly, and even with the upcoming launch of the new product Blackwell, demand for NVIDIA's H100 product remains stable. Previous concerns about a potential decrease in demand for the H100 product by technology companies may have been overstated.

The Second Major Risk: Competitive Ecosystem

Morgan Stanley points out that artificial intelligence is a vast market, and NVIDIA alone with its GPU products cannot meet the entire market demand. Therefore, Amazon wants to develop its own chips, Apple is considering using Google's TPU to perform key tasks in training large models, and AMD is also competing in the GPU market, all of which are putting pressure on NVIDIA's stock.

Fortunately, we have heard that many technology companies that have invested in custom chips or alternatives have returned to NVIDIA's embrace. In the competition of artificial intelligence, NVIDIA still holds a central position, and we believe this situation is unlikely to change in the near term.

The Third Major Risk: Supply Chain Issues

Although NVIDIA is currently facing some supply chain concerns, such as the capacity of HBM3e and cooling issues with the GB200 rack product, NVIDIA is actively addressing these issues. Additionally, there are positive signals of accelerated mass production of the Blackwell product in the second half of the year.

At the same time, Morgan Stanley points out another area of caution: Some of NVIDIA's manufacturing partners (ODMs) in Taiwan may have been too optimistic in forecasting future demand for the GB200 product.

Some ODMs estimate that the demand for GB200 rack products next year could be as high as 50,000 to 90,000 units, which may be overly optimistic.

Calculating based on an average of 54 GPUs integrated into each GB200 rack, assuming a market demand for 70,000 racks, with each rack priced at around $40,000 (GPU at $35,000, CPU and switch at around $5,000), this would require $150 billion.

Therefore, we expect that NVIDIA's data center business revenue next year is unlikely to reach the optimistic level of $300 billion, but rather closer to $164 billion. Excluding revenue from Mellanox and gaming business, revenue from processors is estimated to be around $145 billion.

During this period, the biggest risk still lies in revenue fluctuations. However, in the short term, these data will continue to support NVIDIA's stock price.

The Fourth Major Risk: Concerns about the macroeconomic environment and market valuation compression

Morgan Stanley points out that the overall economic environment may be the most difficult factor to ignore:

Due to the high capital expenditure on cloud computing and GPUs relying on a strong risk appetite environment, spending will definitely be affected if the global economy weakens. At that time, investors' valuation of the company may become more stringent, affecting investors' willingness to invest in risk assets.

Finally, Morgan Stanley pointed out that there are many catalysts in the future that can boost NVIDIA's stock price, such as: upward revisions to profit forecasts or performance expectations, Blackwell product delivery times becoming more certain, NVIDIA's strong response to competitive concerns in the market, and in the semiconductor industry, the AI theme making NVIDIA's business more attractive, etc