Google sees "largest historical surge" while Nvidia plummets! Senior semiconductor analyst at Goldman Sachs recommends "go long on cloud, reduce chip holdings."

Goldman Sachs believes that amid the AI infrastructure construction boom, investors should shift their positions from chip stocks to cloud computing giants.

On Thursday, Alphabet’s stock price surged 10% in a single day, with its market value increasing by $421 billion, marking the company’s largest single-day market value rise ever, and the second largest single-day market value increase in U.S. corporate history.

(Google stock performance over the past year)

Meanwhile, Nvidia’s stock price fell more than 4%, breaking below the $200 mark, with a single-day decline of nearly $10.

Goldman Sachs’ senior semiconductor analyst Jim Covello advised clients in a report to "go long hyperscale cloud service providers, underweight semiconductors."

Covello noted in the report that the current market pricing of investment returns for hyperscale cloud providers already reflects "a considerable degree of pessimism," leading to a significant compression in this sector’s valuation multiples. In contrast, semiconductor stock valuations are clearly overextended.

Google Cloud’s Strong Growth Ignites Market Enthusiasm

The trigger for Alphabet's recent surge was an impressive quarterly earnings report.

Google Cloud’s quarterly revenue growth reached 63%, leaving a strong impression on investors. The operating profit margin of the cloud business expanded substantially from 17.8% a year ago to 32.9%, which management attributed to more efficient technological infrastructure and process innovation.

JPMorgan analyst Doug Anmuth wrote in his Thursday research note:

We believe Google is generating clear and quantifiable returns from its AI investments.

He noted that Google Cloud’s contract backlog nearly doubled quarter-over-quarter to $462 billion in Q1. Anmuth also emphasized:

The virtuous cycle between underlying chips, model improvements, user engagement, and business monetization continues to compound.

On the earnings call, Alphabet stated that AI solutions have become the primary growth driver for Google Cloud, with robust demand for its Gemini-based AI agent products.

The company disclosed that Gemini processes over 16 billion tokens per minute, up 60% quarter-over-quarter.

Alphabet’s Market Value Nears Nvidia, Gap Narrows to About $203 Billion

Strong results propelled Alphabet’s stock to record highs. According to Dow Jones Market Data, the company’s cumulative gain this month has reached 33.8%, its best monthly performance since October 2004.

In terms of market capitalization ranking, the gap between Alphabet and Nvidia has narrowed to about $202.9 billion, the smallest gap since February 5 this year.

In January, Alphabet overtook Apple to become the world’s second largest company by market capitalization.

Over the past year, Alphabet’s stock price has increased by 138.5%. The company has gradually dispelled the narrative that AI poses a “survival threat” to its business; Google’s search business grew 19% in Q1, with query volumes hitting record highs, proving that AI is expanding rather than eroding the search business.

According to Sensor Tower data, Gemini has become the world’s second most downloaded AI app, only behind ChatGPT from OpenAI.

Goldman Sachs: Chip Valuations Overextended, Cloud Giants Undervalued by the Market

Covello pointed out in the report that semiconductor stock valuations are clearly overextended, while hyperscale cloud providers' valuations are below historical averages.

The Philadelphia Semiconductor Index’s 12-month forward price-to-earnings ratio has risen to about 24x, above the 10-year average of 19x; the forward P/E ratio for hyperscale cloud providers is also about 24x, but given their steady cash flow and growth outlook, this sector has historically enjoyed a higher premium.

In recent months, semiconductors have been investors’ most favored AI theme, with the Philadelphia Semiconductor Index up nearly 150% over the past year.

Meanwhile, hyperscale cloud providers such as Amazon, Oracle, Microsoft, Alphabet, Meta have lagged, due to investor concerns about large-scale data center capital expenditures.

(Total capital expenditure by the four major hyperscale data center operators this year is expected to exceed $700 billion)

Covello outlined two scenarios in the report that are advantageous to cloud providers:

First Scenario: Cloud giants begin to demonstrate positive investment returns, dispelling concerns over capital expenditures, driving valuation recovery, while the upside for chip stocks becomes limited due to full market pricing.

Second scenario, regarded by Covello as the "best case": If hyperscale cloud providers' investment returns continue to be under pressure and they are forced to reduce capital expenditures, "we believe cloud giants will experience a significant rebound due to improved cash flow prospects, while semiconductor stocks will slump sharply as declining capex hits their revenues."

The only negative scenario is "status quo": That is, cloud giants continue to spend heavily despite questionable investment returns, further compressing their cash flow dynamics, while continuing to support chip stock valuations. Covello states that this scenario is most unfavorable for the above relative value trade.

Risk Warning and DisclaimerThe market entails risks and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ special investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific situation. Investments based on this article are at your own risk.