Bernstein's Stacy Rasgon on the chips sector: The pie is still hopefully getting bigger

Here's a summary of the YouTube video transcript, maintaining the original language and technical precision:

Key Concepts

• AI Bubble Fears: Concerns about overvaluation in artificial intelligence-related stocks.
• Chip Stocks: Companies involved in the design and manufacturing of semiconductors, particularly those used in AI.
• Nvidia Earnings and Guidance: The financial performance and future outlook of Nvidia, a leading chip manufacturer.
• Gemini 3 (Google): Google's latest large language model, a competitor to OpenAI's offerings.
• AMD: Advanced Micro Devices, another semiconductor company.
• OpenAI: A prominent AI research laboratory.
• Price-to-Forward Earnings (P/E): A valuation metric comparing a company's stock price to its projected earnings per share.
• ASICs (Application-Specific Integrated Circuits): Custom-designed chips optimized for specific tasks, such as AI processing.
• TPUs (Tensor Processing Units): Google's custom hardware accelerators designed for machine learning.
• AI Opportunity: The overall market size and growth potential for AI technologies.
• High-Quality AI Names: Stocks of companies perceived as leaders and having strong fundamentals in the AI sector.

Nvidia's Performance and Market Reaction

The discussion centers on the recent performance of chip stocks, particularly Nvidia, in the context of fears surrounding an AI bubble. Last week saw some profit-taking after significant gains. Nvidia released its earnings and guidance, which were better than anticipated. However, the stock initially sold off in the trading session following the release.

Stacy Rasgon, Senior Analyst at Bernstein, notes that the sell-off wasn't solely driven by Nvidia. While acknowledging that people are becoming nervous about AI bubbles due to the rapid growth in numbers, he points out that Nvidia actually outperformed the broader semi sector on that particular day. Other factors contributed to the market movement, including the release of Google's Gemini 3, which is seen as a strong competitor. Companies more dependent on OpenAI, like AMD, saw declines, potentially due to the perceived threat from Gemini.

Analyst Perspective on Valuation and Sentiment

Rasgon explains his approach to earnings estimates and price targets. He states that projecting earnings is the easier part, while "getting it right" is challenging. Sentiment is always a factor, but he feels comfortable with Nvidia's current valuation. He argues that despite significant stock price appreciation, Nvidia's earnings have more than kept pace. The stock is currently trading at a mid-20s price-to-forward earnings multiple, which he considers not aggressive if the earnings projections are accurate.

The market's reaction, he suggests, implies an anticipation that these high numbers are not sustainable and represent a peak. The core debate, therefore, is about the longevity of this growth. Rasgon believes that while nothing goes up indefinitely, the current trend is clearly not ending soon, possibly not this year or even next, and potentially not by 2027, as the outlook appears robust.

Competition and the AI Opportunity

The rapid pace of technological development, especially in AI, leads to potential shifts in leadership. The release of Google's Gemini 3 is mentioned as a potential disruptor to OpenAI's dominance. Another significant threat discussed is the development of ASICs by major purchasers of Nvidia and AMD chips, who are looking to build their own custom AI processors.

Rasgon clarifies that Google is the primary company that has deployed ASICs at scale, having done so for over a decade with their TPUs. Other companies like Amazon are earlier in this process, with their custom chips not yet deployed on the same scale. He acknowledges the competitive landscape in semiconductors, where companies are always vying for market share.

However, Rasgon's primary concern is not about who is winning or losing in the short term. Instead, he emphasizes the fundamental question: "Is the opportunity in front of us still big or is it not? Is it sustainable or is it not?" He argues that if the AI opportunity remains large and sustainable, then competition is less of a concern, and all players can benefit. If the opportunity is not large, then everyone is at risk. He believes the market is not yet saturated, and the "pie is still hopefully getting bigger."

Investment Recommendations

When asked for his top investment choices, Rasgon reiterates his general call for the year: focus on "high-quality AI names" and "ignore most of the rest."

Conclusion

The discussion highlights the complex dynamics within the AI chip sector. While Nvidia has delivered strong results, market sentiment is cautious due to fears of an AI bubble and the rapid pace of innovation. The emergence of strong competitors like Google's Gemini and the development of custom ASICs present challenges. However, analysts like Stacy Rasgon believe that the overall AI opportunity is still substantial and sustainable, making the current competitive landscape less critical than the long-term growth potential of the market. The focus for investors should be on identifying high-quality companies within this expanding sector.