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On Monday, Nvidia (NVDA) experienced a landmark achievement with a record closing price on the stock market. This accomplishment came amid a booming trend in artificial intelligence (AI) hardware equities, driven by a surge in investor enthusiasm for the growing demand for AI technologies.
Nvidia’s stock has surged by 8% in just one week, bringing the chipmaker closer to surpassing Apple (AAPL) as the most valuable company on Wall Street. The recent uptick in Nvidia’s share price can be attributed to statements made by CEO Jensen Huang and the chipmaker’s partners underscoring the crucial role of Nvidia’s AI processors in the current technological landscape.
The AI craze has not only led to Nvidia’s stock surge but has also catalyzed a rise in the stock prices of other AI processor and hardware companies, such as Arm (ARM), Qualcomm (QCOM), Broadcom (AVGO), Super Micro Computer (SMCI), Astera Labs (ALAB), and Micron (MU). Each of these companies has revealed strong indications of robust demand for their AI-related products. Additionally, on Monday, the stock of Taiwan Semiconductor Manufacturing Company (TSMC) reached an all-time high.
To put things into perspective, the PHLX Semiconductor Index (^SOX) has witnessed a 4.5% increase over the past five days, outperforming the S&P 500 (^GSPC) which saw a 2.9% rise during the same timeframe.
The growing trajectory of AI chip equities underscores a positive outlook for AI hardware spending, assuaging concerns on Wall Street regarding a potential slowdown in investment.
Goldman Sachs analysts highlighted this trend in a report released on October 10, stating, “While Phase 2 stocks [i.e. AI infrastructure-related stocks like Arm, TSMC, and SMCI] appear moderately expensive relative to history, there is a possibility that increased demand for AI technologies could lead mega-cap tech companies to allocate more capital towards AI-related capital expenditures than what investors and analysts currently anticipate.”
Major tech giants like Google (GOOG), Microsoft (MSFT), Amazon (AMZN), and Meta (META) have all affirmed their commitment to substantial investments in AI infrastructure throughout the upcoming year. This bodes well for AI hardware companies like Nvidia. According to Goldman Sachs, it’s expected that mega-cap tech firms will allocate between $215 billion and $250 billion towards AI capital expenditures in 2024 and 2025 respectively.
Moreover, OpenAI’s recent $6.6 billion funding round is poised to inject significant capital into hardware companies such as Nvidia as they continue to advance AI models.
JPMorgan analyst Harlan Sur anticipates a 6% to 8% increase in semiconductor industry revenues by 2024. In communication to investors, he expressed optimism about semiconductor and equipment stocks, projecting continued growth driven by improved supply-demand dynamics in the latter half of 2024 and 2025.
However, a decrease in investment is inevitable at some point. The key question is the timing of this potential downturn.
Unlike AI software which is typically subscription-based, hardware is a one-time sale. Analysts caution that AI chip companies may be in a bubble that could deflate as a result of a significant pullback in AI infrastructure spending by major tech companies.
Recent earnings reports from tech behemoths have unveiled a growing disparity between their hefty investments in AI infrastructure and their return on investment, putting pressure on Wall Street’s patience. Following their quarterly financial results disclosing substantial AI spending, equities of Google, Microsoft, and Amazon saw declines later in the summer.
In an email to Yahoo Finance, D.A. Davidson analyst Gil Luria commented, “We are optimistic about robust data center infrastructure spending in the current year and potentially into the next. However, we expect that hyperscalers may hit a peak in capital expenditures as early as the following year.”
