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Analysts Discuss ‘AI Bubble’ as Nvidia Becomes a $1 Trillion Company

Published 05/30/2023, 03:49 PM
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Tech stocks are enjoying a great first half of the year with Invesco QQQ ETF (NASDAQ:QQQM), a popular tech gauge that tracks the performance of the Nasdaq 100, up about 30% since the start of the year. This compares to the 9.5% increase seen in the SPDR® S&P 500 (NYSE:SPY), which mirrors the performance of the S&P 500.

The rapid ascendance of artificial intelligence (AI) has prompted investors to recalibrate their portfolios and increase their exposure to the basket of AI-focused stocks. Companies like Nvidia (NASDAQ:NVDA), Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ: META), and Microsoft (NASDAQ:MSFT) vastly outperformed the market in the first 5 months of 2023 given their increased focus on emerging technology.

Generative AI is the New Buzzword

ChatGPT, a popular AI chatbot developed by Microsoft-backed OpenAI, became the fastest-growing app ever, following its launch in late November. According to analysts at Swiss investment bank UBS, ChatGPT reached 100 million monthly active users (MAUs) as soon as January, easily displacing TikTok from the top.

"In 20 years following the internet space, we cannot recall a faster ramp in a consumer internet app," UBS analysts wrote in a note.

In March, Open AI launched ChatGPT-4 – the updated version with an increased focus on safety and accuracy. The AI startup said ChatGPT-4 is 82% less likely to respond to requests for disallowed content and 40% more likely to produce factual responses than its predecessor.

Microsoft also introduced a 365 Copilot productivity tool that is powered by generative AI technology. Built on large language models (LLMs), Microsoft Copilot assists users with the most popular Office products – Word, Excel, PowerPoint, Outlook, and Teams.

“Today marks the next major step in the evolution of how we interact with computing, which will fundamentally change the way we work and unlock a new wave of productivity growth,” said Satya Nadella, Chairman and CEO of Microsoft.

“With our new copilot for work, we’re giving people more agency and making technology more accessible through the most universal interface — natural language.”

The rapid rise of generative AI and the success of ChatGPT also prompted Alphabet to expedite the rollout of its AI products. The Search King updated its key tools in May after applying the in-house developed generative AI technology.

Google’s flagship product, Search, has been updated to allow users to ask questions more naturally and reach the most relevant content on the internet. Google also updated Bard, its own AI chatbot, as well as Gmail, Photos, and Maps.

A Bubble - or Just the Beginning?

While Microsoft and Alphabet were seen as clear winners of the generative AI arms race, it was not until Nvidia reported its Q1 earnings that the wider investing community started paying more attention to AI-focused companies.

“Investors are extremely interested in this space, even in light of questionable economic data and challenges in equity and fixed-income markets,” said David Mazza, chief strategy officer at Roundhill Investments.

The chipmaker saw its share explode last week after the company reported stronger-than-expected results for its first quarter. More importantly, Nvidia said it expects to generate $11 billion in Q2 sales, topping the Street expectations by over 50%.

The management commentary on the earnings call also helped shares to rally as the company’s CEO, Jensen Huang, estimated that:

“A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”

The rapid rise in the valuation of AI-exposed stocks has also opened a debate if AI investing is a new bubble, similar to the surge in Bitcoin prices in 2021. Bank of America analysts said the AI is in a “baby bubble” for now.

“The overall economy is not rising at the gains these stock prices represent. That makes me worried for the valuations,” Andy Constan, chief executive officer of Damped Spring Advisors, told WSJ.

This is not the view of Wells Fargo’s equity strategist Christopher Harvey, who argued that these big tech companies, like Microsoft, Alphabet, and Nvidia, offer “pristine balance sheets, stable earnings growth, [and] mostly reasonable valuations.”

The tech bull and prominent Wedbush analyst Daniel Ives said this week that Microsoft could potentially add $300 billion to its market capitalization thanks to the rapid rise of AI.

"ChatGPT will be the next leg of the growth stool for Microsoft. Redmond is just starting to hit its next gear of growth with ChatGPT and AI also adding a new layer of growth to the Microsoft story over the coming years," Ives said Monday in a research note according to Business Insider.

Microsoft and Google shares rose 39.2% and 40.3% year-to-date, respectively.

On Tuesday, Nvidia became the first-ever chip company valued at $1 trillion. The stock is up 173.6% YTD. The one-day rally in Nvidia shares last week saw the chipmaker add almost $200 billion to its market cap.

Summary

While analysts are likely to continue debating the AI bubble, investors are expected to continue riding the AI bandwagon as long as companies like Nvidia can prove that AI sales are helping reaccelerate revenue growth. Moreover, the visibility has increased despite ongoing macroeconomic headwinds as AI technology adoption is still in its early innings.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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