Nvidia is the top AI pick and the stock could jump 15% as demand has picked up since the chip maker's blockbuster earnings report, Morgan Stanley says

• Morgan Stanley raised its price target on Nvidia to $500 and called the stock its "top pick."

• Analysts said demand has picked up since the chip maker's blockbuster earnings report last month.

• Nvidia is getting orders from customers who weren't thought of as major buyers until now.

Nvidia stock has more room to climb as demand has only picked up since the chipmaker's blockbuster earnings report last month, Morgan Stanley said.

Analysts raised their price target on Nvidia, which has blown away Wall Street with its artificial intelligence chips, to $500 from $450, representing 15% upside from current levels.

That's despite shares already soaring 200% year to date and joining a handful of other tech giants with a market cap of $1 trillion or more.

Morgan Stanley also named Nvidia its new "top pick," taking that moniker away from the previous holder, rival chip stock AMD. Analysts said Nvidia has more near-term upside, predicting it will be the only company that will beat estimates and raise its guidance this calendar year.

"The demand environment for AI training has continued to pick up since NVIDIA reported, with our industry contracts reporting daily new orders from customers that were not contemplated as major customers until now," the note said.

Last month, Nvidia increased its second-quarter revenue forecast to $11 billion, more than 50% above consensus, due to the growing generative artificial intelligence market. The company's AI chipsets help drive the technology behind OpenAI's ChatGPT and Alphabet's Bard chatbots.

Morgan Stanley said there has been a rapid shift in investment away from the traditional server infrastructure and toward AI infrastructure, calling Nvidia the "cleanest story in AI hardware."

"While we have been positive since upgrading the stock earlier in the year, we were nowhere near as optimistic as we should have been," analysts said.

Not only are existing customers accelerating their spending, but there's also strong spending coming from app developers, enterprise IT departments, and even governments, according to the note.

While the numbers may not be sustainable in the long term, Morgan Stanley still sees "higher capital intensity" through the next several years.

"Frankly, the commentary around these markets is more positive than anything we have heard in 29 years of covering semiconductor stocks."

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