Bets on artificial intelligence (AI) have sent markets into a tailspin in the first half of 2024. Big tech companies and investors don’t want to be left behind in a technology race that some are comparing to the advent of the internet or even the steam engine. But the current winner of this wild ride is Nvidiaa company specializing in manufacturing chips needed to train AI systems.
Led by Jesen Huang and founded 33 years ago, Nvidia has broken many records: it has dominated the S&P 500 over the last 12 months by tripling its value and has become the most valuable company in the world. beat Microsoft or Appleexceeding $3.2 trillion. Since the launch of the first ChatGPT model in late November 2022 — the trigger for the current AI fever — Nvidia’s value has soared 700%.
But it’s not just Nvidia that’s seeing its value soar. Big tech companies are going all out to train their own AI models, and they’re getting the blessing of the stock markets to do so. Microsoft is up 38% in the past 12 months, while Alphabet, Google’s parent company, is up 57%. The phenomenon isn’t exclusive to the US, though. European stock exchanges boast their own Nvidia equivalents: Dutch giant ASMLmaker of machines on which electronic chips are printed, has been crowned the most valuable company on European markets after overtaking France’s LVMH. And in Asia, Taiwan’s TSMC is aiming to join the club of companies valued at $1 trillion, after jumping 170% on the stock market in the first half of 2024, approaching a market capitalization of $950 billion.
Investors have bet on a technology that, while not new, creates language and images, and whose development promises to revolutionize everything from pharmaceuticals by accelerating the creation of drugs to advertising through hyper-personalization, from computer technology and programming to the oil industry. But as big tech companies break market cap records week after week, the market is also expressing doubts: Will this technology one day crystallize into corporate profits, or is the great AI rally a new version of the dot-com bubble of the 2000s?
At that time, the emergence of the Internet and the proliferation of websites seemed destined to revolutionize everything. But it did, but the pace of the economy is not that of the markets. Thus, before the great transformation, technology stocks plunged and thousands of projects, some of them large-scale, had difficulty surviving. A well-known example is Cisco, a manufacturer of equipment for deploying and connecting the Internet, largely favored – like Nvidia – by massive investments from third parties. Cisco shares went from $5 in 1997 to $77 in 2000, to be only $13 in 2002. Today, they are at $46.
Analyst Pierre Ferragu of New Street Research on Friday, July 5, downgraded his forecast for Nvidia’s stock price, arguing that its stock price had already peaked. “A further upside will only materialize in a bullish scenario, where the outlook beyond 2025 increases materially, and we are not yet convinced that such a scenario will play out,” he told Bloomberg. But optimism seems to be winning out. Nearly 90% of analysts tracked by Bloomberg recommend buying the stock. “The results will take time, but they will come,” said Flavio Muñoz, head of technology investments at Andromeda Capital. He believes that 2024 is unlikely to see the technology reach its full potential and deliver the returns that have been anticipated.
Companies are now rushing to place their orders specialized chips To power their transformation, companies rely on Nvidia as their primary supplier. Based in Santa Clara, California, the company first established itself as a leading maker of graphics cards (GPUs) for video games. Over the years, these chips have proven to be the most efficient at the type of work needed to train neural networks, the heart of AI, thanks to the fact that they can perform multiple operations in parallel, unlike traditional processors, called CPUs. In this way, the company has unwittingly turned into a golden goose. Since then, Nvidia has refined its products with AI in mind, and orders have exploded. In the first quarter of the year, the company’s revenue jumped 262%, after sales of $26.044 billion. And profits rose from $2.043 million to $14.881 million, an increase of 628%.
The buyers fueling this frenzied demand are members of the Magnificent Seven—Microsoft, Apple and Amazon—who need the processing power of Nvidia’s GPUs to develop and run their AI models on massive amounts of data. That explosive demand is the basis for Nvidia’s stock market stardom. But it’s not just big tech that’s jumped on the bandwagon. AMD, which also makes graphics cards, is up 18% year-to-date, and Qualcomm, which makes chips for mobile phones, is up 45%. TSMC of Taiwanwhich is a leader in semiconductor manufacturing, has also managed to post a 70% rise in the stock market while in Europe, ASML has climbed 50% this year to date.
Danny Fish, a technology portfolio manager at Janus Henderson, believes that the existence of internet giants is essential to the development of AI. “They are the only companies that have the financial capacity and infrastructure to deploy the potential of artificial intelligence,” he says. UBS analysts classify Nvidia and its rivals in what they call the enabling phase of AI, which extends from semiconductor design to chip manufacturing. “It is advisable to invest in companies at this stage,” says the Swiss bank’s investment team, arguing that “while there is a risk that overcapacity concerns could lead to volatility, this segment currently offers the best reinvestment opportunities and reasonable valuations.”
According to these experts, the other two phases of the AI value chain are intelligence and application. These phases are supported by companies that develop AI models like Open AI (the second phase) and those that develop AI for specific sectors like cybersecurity and financial technology (the third phase). At present, UBS believes that it is safer to bet on the first part of the chain, that of facilitation, because it offers “strong competitive positioning, better reinvestment margin and reasonable valuations.”
Muñoz, of Andromeda Capital, stresses, however, that it is necessary to look at other stocks that participate in this ecosystem and that have great growth potential. These include memory manufacturers for data center operations, such as South Korea’s SK Hynix and the American Micron Technology; network infrastructure providers such as Broadcom and Cisco; and software companies and cybersecurity system providers such as Confluent and Snowflake.
Storm on the horizon
Other executives, such as David Azcona, chief economist at Beka Finance, warn that walls can still be erected to slow the growth of the entire sector. The lack of concrete investments promised in the first half of the year and the emergence of competitors are the main risks, he points out. Matthew Bullock, chief strategy officer at Janus Henderson, adds that AI in its truest form is a fairly small market and very few companies are making the largest share of their revenue from it.
In fact, the Magnificent Seven alone have generated 60% of the S&P 500’s total returns this year. On average, S&P 500 stocks are up 4.1% this year, while the overall index is up 14.5%. According to the Wall Street Journal, this imbalance is the largest since at least 1900. Muñoz explains that many investors are waiting for the next move from the U.S. Federal Reserve, which until last year was capable of three rate cuts, “but now it looks like it won’t even do one.”
Azcona estimates that growth will be moderate in the second half of 2024. Political uncertainty in the United States as elections approach and a diffuse interest rate scenario, accompanied by a possible drop in consumption and an increase in unemployment, lead him to think that the rally observed in the first part of the year will be difficult to reproduce in the months to come.
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