Can this massive rally in AI chip stocks continue? Bernstein answers

Investing.com -- The Philadelphia Semiconductor Index has surged 66% in just five months and 162% year-on-year, dwarfing returns in the S&P 500 and Nasdaq, but Bernstein analyst Stacy Rasgon believes the rally has further to run, because it has been driven almost entirely by earnings growth rather than multiple expansion.

"While SOX blended NTM earnings estimates are up ~69% since the start of the year, the SOX P/FE multiple is actually down slightly (~2%)," Rasgon wrote, adding that "earnings growth has accounted for more than 100% of the sector move YTD."

The sector currently trades at approximately 28 times forward earnings, which is elevated, but well below peak levels.

Rasgon stated that "the controversy should probably be on earnings sustainability rather than valuations."

Within the sector, Rasgon flagged a growing divergence that he sees as an opportunity. GPU and ASIC names, alongside semiconductor capital equipment stocks, have seen relatively muted multiple expansion despite strong earnings growth, suggesting room for catch-up.

By contrast, analog and CPU names have seen more aggressive multiple re-rating relative to their earnings increases.

Memory stocks have been the most extreme, with average share prices more than tripling year-to-date on an earnings outlook that has nearly quintupled, even as multiples have declined on peak cycle concerns.

Bernstein remains bullish on Nvidia, Broadcom, and semiconductor capital equipment names, noting that Nvidia and Broadcom "both screen cheap" at roughly mid-teens forward earnings on realistic 2027 estimates.

The firm recently warmed to AMD, seeing a path to $20 in earnings per share by 2028, and rates Applied Materials, KLA, and Lam Research Outperform as well.

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