Investing.com -- Bernstein analysts said their analysis shows concerns about crowded AI positioning in hardware and chip stocks "have merit," even after the trade has partially unwound.
Analysts led by Daniel Zhu found communications equipment, semiconductors, and computers and peripherals are all relatively crowded subsectors. That stands in contrast to longer-term history, in which networking and hardware "have often screened as out-of-favor sectors," the analysts said.
Communications equipment is the most crowded subsector by a significant margin, with a Z-score of 0.74, followed by semiconductors at 0.31 and electronic equipment at 0.28, Bernstein’s analysis shows. Technology overall is the most crowded sector but is not especially crowded relative to history, the analysts said, with financials and industrials showing more elevated crowding by that measure.
Semiconductor and semiconductor equipment coverage is "generally very crowded," with seven of 12 names in the top decile, they noted. AI semis are the most crowded group, led by Broadcom, AMD and Nvidia, followed by chip equipment makers Applied Materials, Lam Research, KLA and PDF Solutions, and then analog chips from Analog Devices, NXP and Texas Instruments.
Qualcomm, meanwhile, is an exception. The stock has been the least crowded name in Bernstein’s coverage and has largely been in the bottom decile since the start of the year, apart from a brief squeeze in April and May. KLA has also been notably less crowded than its chip equipment peers since June, the analysts said.
In IT hardware, crowding has polarized around AI and memory. Apple, Western Digital, Seagate and Dell sit firmly in the top decile, while HP Inc. and Super Micro are in the bottom two deciles amid component cost pressures or company-specific risks.
SanDisk, despite being a pure-play beneficiary of the NAND upcycle and up more than 400% this year, has been the least crowded name, with scores between 9 and 10 since July on fears that price increases are decelerating. Bernstein sees that as "a potential mispricing," though the analysts cautioned that its short trading history makes the score less reliable.
Networking coverage is also very crowded, with five of seven names in the top decile. Celestica has seen a sharp decline in crowding since summer, and Corning has moved from relatively uncrowded to near the median.
Bernstein reiterated its Outperform ratings on Arista, Ciena, Lumentum, Coherent and Celestica, but the analysts said the names continue to face risk from a further crowding drawdown.
"We continue to believe that monitoring exposure to crowded names is critical to risk management," the analysts concluded.
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