We recently compiled a list of the BofA’s List Of AI & Semiconductor Stocks That Fund Managers Love & Hate: 16 Stocks On The Manager Radar. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against the other AI and semiconductor stocks in BofA’s list that fund managers love and hate.

The initial wave of artificial intelligence investing has shaken up the stock market. Suddenly, technology stocks are divided between those that have exposure to AI and those that don’t. The former category has soared to set records while the latter has been lackluster because of the state of sluggishness in the non-AI business world.

Within AI stocks that have outdone themselves, semiconductor stocks are a standout. Additionally, just as is the case with broader technology stocks, semiconductor stocks are also divided between those with AI and non-AI exposure. The best example of the former category is Wall Street’s top AI stock pick. This stock is of a firm that designs and sells GPUs used to process AI workloads. Its shares are up 845% since the 2023 start and have set multiple records since OpenAI’s Chat GPT became publicly available.

On the flip side, another semiconductor stock has floundered during the same period even though it’s one of the oldest and largest semiconductor companies in the world. This stock belongs to a firm that is also one of the only three companies in the world that can manufacture high-end semiconductors and it is the only one which is headquartered in the US. While the GPU designer’s shares have gained 845%, over the same time, this semiconductor stock is down 13.9%, and year to date the shares have bled an unbelievable 53.14%.

Therein lies the bifurcation between semiconductor stocks that is fueled by the artificial intelligence wave. However, these returns might belong to the first stage of AI stocks only, implying that other semiconductor companies could also see gains provided robust AI software demand and the ability of firms to monetize their products.  We covered a lot of such potential stocks as part of our coverage of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks.

In this list, there were five semiconductor stocks. Four of these are semiconductor manufacturers while the remaining stock is the firm whose designs are the backbone of the modern-day smartphone industry. The stocks are ranked 19th, 16th, 14th, 8th, and 6th. Looking at their year-to-date performance, these stocks are up roughly 45%, 51.7%, 65.7%, 97.8%, and 122% year-to-date, respectively. Safe to say, the AI wave has been kind to these stocks. The next step in our brief analysis is to see what analysts believe the future holds for these firms. To do this, one particularly useful ratio is the forward price to earnings since it gauges the current price to analyst estimates of future earnings.

For these five phase two AI semiconductor stocks, the forward P/E ratios in respective orders are roughly 31.25, 50.51, 29.41, 25.19, and 99 times. The forward P/E ratio for global and US semiconductor stocks is 45.77 so most of these stocks are fairly valued. Consequently, this implies that in case of an AI correction that sees investor sentiment evaporate for any reason, these stocks might not be hit as hard as those speculating about an ‘AI bubble’ might worry, but if Wall Street finds more reasons to add to its AI euphoria, then their valuation might further bloom for more gains.

Shifting gears, the average forward P/E ratio for the semiconductor industry also leads us to wonder which stocks are driving this average value higher. After all, the six AI chip stocks we’ve covered above include some of the biggest companies in the world. However, high P/E ratios commonly belong to smaller companies that earn small profits but have a much higher share price. Two stocks that we’ve identified that have at least 2x the average forward P/E ratio are both unprofitable right now. The one with the higher forward P/E ratio of 196.08 ranks 20th on our list of Piper Sandler’s Top Technical Stock Picks: 20 Best Stocks while the second with a beefy ratio of 133.33 ranked 32nd on this list of AI stocks that were recently trending.

So, the next question to ask is, what makes these stocks so special that despite the fact that neither is currently profitable, investors have valued their shares more than 100 times over their projected earnings? Well, starting from the first stock with the higher P/E ratio, this firm is one of the few hardened integrated circuit manufacturers in the US. It makes radiation-resistant chips for the US military and its tools enable chip designs at various nodes. The second stock, which is up 49% year to date, is a specialty chip manufacturer that makes and sells silicon-based timing devices as an alternative to quartz-based products. These are used in applications such as edge computing and 5G networks – systems that are closer to end users and therefore must endure more strenuous working environments.

Our Methodology

To make our list of semiconductor stocks that fund managers love and hate according to BofA, we used its recent list of semiconductor stocks that were popular or losing popularity with fund managers. The list was divided into two sections based on expansion or decline in ownership.  Stocks within each category were ranked by the number of hedge funds that had bought the shares during Q2 2024. For an interesting exercise, you can also compare these stocks with those on our lists of Goldman Sachs’ List Of Stocks That Hedge & Mutual Funds Love & Hate: 28 Stocks On The Mutual and Hedge Funds Radar.

For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

NVIDIA Corporation (NASDAQ:NVDA)

Number of Hedge Fund Holders In Q2 2024: 179

Section: Gaining Popularity

NVIDIA Corporation (NASDAQ:NVDA) is the world’s leading AI GPU designer and also the GPU design stock that we covered in our introduction. Its GPUs are used for AI workloads, in data centers, for gaming, professional rendering, cars, and in consoles. This provides NVIDIA Corporation (NASDAQ:NVDA) with a strong presence in the GPU industry and makes it the market leader in terms of performance and market share. The firm also benefits from its CUDA software which enhances the control that users can exercise over their hardware. Additionally, it also means that even if AI spending slows down, NVIDIA Corporation (NASDAQ:NVDA) can capitalize on data centers shifting to accelerated computing. CEO Jensen Huang believes that limitations in chip fabrication have necessitated the use of GPUs as accelerated computing products, which opens up a trillion-dollar market for NVIDIA Corporation (NASDAQ:NVDA). Yet, the firm could see headwinds if there is a glut in the industry or if the trend of custom AI chips grows.

Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the firm said:

“More recently, however, we’ve entered the period of doubts and questioning, some of which is real and normal in the first stages of a new paradigm, and some of which is prompted by short sellers. Given the explosive returns of NVIDIA and other AI leaders, AI bears and fear mongers have been comparing the current AI market winners with the internet bubble of the late 1990s/early 2000s, and NVIDIA’s stock move today with Cisco’s back then. First, while many stocks were trading at nosebleed valuations and on made up metrics (such as price per eyeballs) before the bursting of the internet bubble, as we’ve said many times, the internet proved to transform our world and create the digital age we are now living in. Second, while NVIDIA’s stock price inflection has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by explosive growth in revenues, earnings, and cash flows– not multiple expansion. Over the last 12 months, NVIDIA’s stock has eectively tripled, but its forward P/E multiple has remained essentially flat, because NVIDIA blew away Wall Street expectations despite being covered by over 60 sell-side analysts, who have increased their forward projections every single quarter. In my career, the only comparative analogue is when Apple first introduced the iPhone and stunned Wall Street with its growth. In contrast, most of Cisco’s move in the late 1990s was due to multiple expansion. At its peak, Cisco traded at a P/E ratio over 130 times, more than quadruple its five-year average of 37 times. At the end of the second quarter, NVIDIA traded at a P/E ratio of 40 times, equal to its five-year average, and at a P/E to growth (or PEG) ratio for 2025 of 0.8 times, as consensus expectations are for NVIDIA to grow earnings per share 40% next year.

Moreover, investor concerns have arisen about the financial impact AI is having and whether surging capital expenditures (capex) across the technology landscape, particularly the large cloud players (Microso, Google, Amazon, and Meta), known as the hyperscalers, will be justified and earn reasonable returns on invested capital (ROIC). First, the adoption and penetration of new technology typically traces a classic S-curve–or more precisely, in our view, a series of S-curves or phases. For at least the past year and a half, we’ve been in what might be called the AI infrastructure- build phase – building the AI factories, as NVIDIA CEO Jensen Huang has articulated it, and this phase has been dominated by the infrastructure- layer players – the accelerated computing chips suppliers like NVIDIA and Broadcom, as well as data center, cloud infrastructure and energy companies. The hyperscalers, other enterprises, and sovereign entities investing ahead understand that if you want to be in the AI game, you must invest now – build the infrastructure, build the factories – or else you’ll find yourselves disrupted on the sidelines or playing catch up in the biggest game, the most important race in a technology generation. Only those who invest today even have the chance to be the winners of the future.”

Overall NVDA ranks 1st on our list of the AI and semiconductor stocks in BofA’s list that fund managers love and hate. While we acknowledge the potential of NVDA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.