Top Line
Some of the artificial intelligence stocks that have driven stock market gains over the past 20 months have been hurt by the broader market's recent shift from high-growth potential to safer options amid concerns about a looming economic slowdown.
After driving a record rally, Nvidia shares led the recent decline.
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Key Facts
“AI tourists are starting to leave,” Bank of America analysts led by Mariana Pérez Mora wrote in a client note after the earnings report of analytics giant and defense contractor Palantir, one of the AI stocks that has resisted the recent sell-off and risen 8% over the past month.
Shares of Nvidia, the Silicon Valley semiconductor chip designer and one of the most beloved AI stocks for its dominance in designing the technology behind generative AI, are down 21% over the last month despite a recent surge and were trading nearly 30% below its June high on Friday, shedding about $700 billion in market capitalization over the past six weeks.
Other trillion-dollar companies that rely heavily on AI are also struggling, with shares in cloud-computing rivals Amazon and Microsoft falling 16% and 12%, respectively, last month.
Nvidia's tech chip peers, including Advanced Micro Devices (down 25% from last month), Broadcom (-16%), Intel (-43%), Qualcomm (-21%) and Taiwan Semiconductor (-11%) are faltering.
Shares of other smaller companies developing the technologies behind generative AI, including Lam Research (-28%), Marvell (-18%) and Supermicro Computer (-44%), fell as well.
Important Quotes
Comparing the AI investment pile to the California Gold Rush of the mid-1800s, Pérez writes, “Both events were marked by hundreds of thousands of people jumping in to make their fortunes. Like the Gold Rush, a lot of money was made in both cases, but the 'AI rush' seems to have dried up.”
Contra
The drop in stock prices has found a rare spot of value in expensive AI stocks for investors who still believe in the AI vision. According to Morgan Stanley research, NVIDIA's stock is trading at about 30% below its average price-to-earnings (P/E) ratio over the past five years, which compares market value to future expected earnings, and is roughly the same as it was in November 2022, just before the launch of ChatGPT, the generative AI chatbot that sparked the AI boom. A Morgan Stanley group led by Eric Woodring noted that the so-called “Magnetic Seven,” seven American technology giants including Apple, Microsoft, and NVIDIA, are trading at about a 7% discount to their average P/E valuation over the past five years. “Magnetic Seven valuations still face significant downside risk in a black swan or recession scenario,” Woodring said, adding that “after the recent decline, current Magnificent Seven valuations relative to future growth prospects are attractive.”
Main Background
Concerns about a weakening U.S. economy have grown since the U.S. unexpectedly reported its highest monthly unemployment rate in nearly three years last Friday. Tech stocks have historically been sensitive to fears of an economic slowdown because they rely on heavy external spending on products and internal spending to develop products such as new AI models. The collapse over the weekend of the “carry trade,” in which traders borrowed at near-zero interest rates in Japan to buy riskier assets such as U.S. tech stocks, sent tech stocks plummeting in unison, with the seven biggest tech stocks losing as much as $650 billion in trading on Monday.
