Morgan Stanley Bets Big on Nvidia, Targets $1,000 Amid Surge

Key Takeaway

• Morgan Stanley Wealth Management increases Nvidia stake, setting a $1,000 price target amid a 67% YTD surge and AI chip optimism.
• Investor sentiment shifts to caution with the AAII bull-bear spread at -1.8; tech stocks like Nvidia remain popular despite market downturns.
• Rising geopolitical risks and higher interest rates prompt investors to adopt hedging strategies, with increased demand for VIX futures and S&P 500 put options.

Nvidia's Market Performance

Morgan Stanley Wealth Management has recently increased its position in Nvidia, signaling strong confidence in the company's future performance. Despite a broader market sell-off, Nvidia's shares rose by 3.7% on Thursday, marking an 8.4% increase for the week. This rebound is notable, especially considering the stock's 14% loss the previous week. Year-to-date, Nvidia has seen an impressive surge of almost 67%, following a more than threefold increase in 2023. Morgan Stanley has set a price target of $1,000 for Nvidia, suggesting a potential 21% increase from current levels. The firm justifies this target by pointing to Nvidia's valuation, which aligns with historical trough multiples, and its dominant position in the AI GPU market, characterized by significant economies of scale and pricing power.

AI Tailwind Boosts Nvidia

Nvidia's recent announcement of a new AI chip could further bolster its market position. Morgan Stanley Wealth Management anticipates that if demand for this new chip exceeds supply, similar to the trend observed with Nvidia's current AI chip, consensus expectations for the company's gross margins in FY25 and FY26 might be underestimated. The wealth manager argues that Nvidia deserves a premium valuation due to its significant exposure to AI and the higher probability of upward earnings revisions in the near term. This perspective underscores the growing importance of AI technology in driving Nvidia's market value and investor confidence.

Retail Sentiment and Market Dynamics

The American Association of Individual Investors (AAII) survey indicates a shift in investor sentiment, with the bull-bear spread turning negative for the first time since November, registering at -1.8. This shift suggests a growing caution among investors, despite a steady bearish outlook and an increase in neutral views. Meanwhile, the S&P 500 has declined by 4.7% since the end of March, amid concerns over US economic growth and persistent inflation. However, retail traders continue to show interest in tech stocks, including Nvidia, Tesla, and AMD, indicating a strategy of buying the dip amidst market downturns. This trend highlights the resilience of tech investments in a challenging economic environment.

Hedging Against Uncertainty

As geopolitical risks mount and expectations set in for prolonged higher interest rates by the Federal Reserve, investors are increasingly adopting hedging strategies. The surge in the Cboe Volatility Index (VIX) above the key 20 level for the first time in six months reflects this growing demand for market hedges. With the cost of options contracts remaining relatively low, investors have an opportunity to secure inexpensive insurance against further market declines. Portfolio managers and professional hedgers are exploring various options, including VIX futures and put options on the S&P 500 and the Invesco QQQ Trust Series 1 ETF, to mitigate potential losses.

Street Views

• Morgan Stanley Wealth Management (Bullish on Nvidia):

  "Nvidia is poised for even bigger gains from current prices... The bank sees Nvidia as a leader in AI GPUs, noting its economies of scale and pricing power. NVDA should trade at a premium given its higher probability of upward [earnings] revisions in the near term."