AI Hardware and Chip Stocks Remain a Crowded Trade, Bernstein Warns

Investor concerns about crowded positioning in artificial intelligence-related hardware and semiconductor stocks have merit, even after the popular trade has partially unwound, according to a new analysis from Bernstein. Analysts led by Daniel Zhu noted that while the technology sector as a whole is crowded, certain subsectors have become particularly concentrated, representing a shift from their historical status as out-of-favor investments.

Sector-Specific Crowding

The Bernstein report quantifies this crowding using Z-scores, which measure how a data point deviates from the average. It found that several hardware-focused areas show significant investor concentration.

• Communications equipment is the most crowded subsector by a significant margin, with a Z-score of 0.74.
• Semiconductors follow at 0.31.
• Electronic equipment registers a Z-score of 0.28.

While technology is the most crowded overall sector, the analysis noted that financials and industrials are showing more elevated crowding relative to their own historical levels.

Divergence Among Key Stocks

Ad

Within semiconductors, the report highlights that AI-related stocks are the most crowded group, led by Broadcom (AVGO), AMD (AMD), and Nvidia (NVDA). Chip equipment manufacturers such as Applied Materials (AMAT) and Lam Research (LRCX) are also heavily owned. In contrast, Qualcomm (QCOM) stands out as one of the least crowded names in Bernstein's coverage, having remained in the bottom decile for most of the year.

The IT hardware space is similarly polarized. AI and memory-related stocks like Apple (AAPL), Western Digital (WDC), and Dell (DELL) are firmly in the top decile for crowding. Conversely, names like HP Inc. (HPQ) and Super Micro (SMCI) are in the bottom two deciles. Bernstein flagged SanDisk as the least crowded name, viewing its low ownership as a "potential mispricing," though cautioned that its short trading history makes the score less reliable.

Investor and Market Implications

Networking stocks were also found to be very crowded, with five of the seven names in Bernstein's coverage ranked in the top decile. The firm reiterated its Outperform ratings on several stocks, including Arista (ANET) and Ciena (CIEN), but warned that these names face continued risk from a potential "crowding drawdown" as investors unwind their positions.

The analysts concluded that for investors, managing risk requires diligent oversight of these popular trades. "We continue to believe that monitoring exposure to crowded names is critical to risk management," the report stated.