Is This the End of the AI Rally, or Just Another Phase in the Cycle? "There Will Be Winners and Losers"
Is the AI stock market boom losing steam? Following Nvidia's latest results, the leading chipmaker saw its stock price drop by more than 14% in just a few days. This decline has also affected other semiconductor companies, the tiny circuits that play a critical role in the global economy.
"The results announced last week (by Nvidia) exceeded market expectations, but the rate of outperformance/surprise declined sequentially [...] The company is finding it harder to beat forecasts, and it's becoming less likely that the market will tolerate setbacks," commented Hyun Ho Sohn, Manager of the FF Global Technology Fund at Fidelity International, in a recent analysis published on Finect.
In addition to Nvidia, two other global giants, ASML and TSMC, have emerged as leaders in the early stages of the AI value chain: the production of microchips.
These so-called "Three Magnificent" AI companies dominate GPU design (Nvidia), advanced semiconductors for GPUs (TSMC from Taiwan), and the lithography machines necessary for this process (ASML from the Netherlands).
"The competitive advantages of these companies are so significant that they should remain dominant throughout this innovation cycle," note Olivier de Berranger, CEO and CIO, and Adrien Bommealer, fund manager at La Financière de l’Echiquier (LFDE).
Heavy Initial Spending
Investment in these early-stage technologies to implement AI has been soaring in recent years. But is all this spending worthwhile, or is it driven by FOMO (fear of missing out) in the tech race?
Capital expenditure by major tech and cloud companies has increased, especially in energy-intensive data centers, as they compete to develop AI.
"Investors are wondering if the future revenues of the leading tech and cloud companies justify the billions of dollars being invested in AI," BlackRock analysts question.
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Capital spending by major tech companies has been steadily rising. BlackRock reports that it's crucial to differentiate between specific companies and the economy at large, but they continue to overweight the AI theme in their portfolios. "However, we’re seeing signs that could make us reconsider, such as a stagnation in revenue growth or slow adoption of AI," they add.
BlackRock also highlights that tech valuations haven’t yet reached the levels seen during the 2000s or the pandemic. In their chart, BlackRock illustrates the evolution of valuation multiples for public tech companies, showing the enterprise value to revenue ratio (EV/Revenue) of over 1,000 tech companies with a market cap exceeding $1 billion.