Cloud Capital Expenditure Growth to Boost Aspeed Technology and Data Center Supply Chain

Morgan Stanley names Aspeed Technology top pick, projects 44% cloud capex growth in 2024, and raises price target to $159.

By Bill Bullington

6/10, 20:13 EDT

Key Takeaway

  • Morgan Stanley names Aspeed Technology, a Taiwan-listed chip designer, as its top pick due to its unique position as the sole BMC supplier for Nvidia's GB200.
  • Cloud capital expenditure is projected to grow 44% year-on-year in 2024, benefiting Aspeed and the data center supply chain.
  • Diversification beyond big tech is advised; BJ’s Wholesale Club and Thermo Fisher Scientific are highlighted for their strong returns and growth potential.

Aspeed Technology Named Top Pick

Morgan Stanley has identified Aspeed Technology, a Taiwan-listed fabless chip designer, as its new top pick, describing it as a "unique Nvidia proxy." Aspeed is the sole supplier of baseboard management controller (BMC) processors for Nvidia's artificial intelligence graphics processing unit, GB200. Morgan Stanley analysts highlighted the company's strategic position, stating, "We see Aspeed as a unique NVIDIA-related play, being the sole BMC supplier for GB200 and a key supplier to help realize Omniverse adoption." Omniverse is Nvidia's 3D graphics collaboration platform.

The bank also noted Aspeed's expanding customer base in smart city and smart factory projects, including government and semiconductor fab initiatives. Although non-BMC business currently contributes only 10% of Aspeed's total revenue, Morgan Stanley expects this to positively impact the company's overall gross margin trend. With an average selling price of $100 per chip, the bank estimates Aspeed could achieve gross margins of 90%.

Cloud Capital Expenditure Growth

Morgan Stanley projects a positive outlook for cloud capital expenditure, which is expected to benefit the data center supply chain, including BMC processors used in data center equipment. The bank estimates cloud capital expenditure growth to be 44% year-on-year in 2024, a significant acceleration from the 2% growth seen in 2023. This projection follows earnings reports from major hyperscalers such as Meta, Microsoft, Amazon, and Google. Hyperscalers are large-scale data centers that provide substantial computing power and handle much of the cloud computing for AI applications.

The anticipated growth in cloud capital expenditure is expected to drive demand for Aspeed's products, further solidifying its market position. Morgan Stanley has increased its price target for Aspeed to 5,150 Taiwanese dollars ($159), implying an upside of around 20%.

Diversification Beyond Big Tech

Aaron Dunn, portfolio manager at Morgan Stanley’s U.S. Value Fund, emphasized the importance of diversification beyond the heavily concentrated "Magnificent Seven" stocks, which include Nvidia, Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla. Dunn advised investors to consider broader market allocations, stating, "You need to have allocations to ... other parts of the market, because you will be glad you did at some point, and that day will come."

Dunn highlighted two stocks he finds particularly attractive: BJ’s Wholesale Club and Thermo Fisher Scientific. BJ’s Wholesale Club, a membership chain, offers strong returns on capital and robust free cash flows. The company has a significant digital footprint and potential for store expansion. Shares in BJ’s have risen approximately 32.7% year-to-date and nearly 41% over the past 12 months.

Thermo Fisher Scientific, a healthcare services and biotechnology company, is another favorite for Dunn. He described it as an industry leader with a diversified portfolio and a strong M&A growth strategy. Despite a slowdown in healthcare spending post-Covid, Dunn believes the company is poised to benefit from renewed industry spending. Shares in Thermo Fisher have increased around 9.5% year-to-date and 12.8% over the last 12 months.

Street Views

  • Morgan Stanley Analysts (Bullish on Aspeed Technology):

    "We see Aspeed as a unique NVIDIA-related play, being the sole BMC supplier for GB200 and a key supplier to help realize Omniverse adoption."
    "We now also see more smart city and smart factory customer wins for Aspeed, including government and semiconductor fab projects. Although the current revenue contribution from non-BMC business accounts for only 10% of total revenue, we expect this to aid the overall gross margin trend."