Topline
Several of the artificial intelligence stocks that helped drive a stock rally over the past 20 months have been impacted by the broader market’s recent shift from high growth potential to safer options, amid concerns about a looming economic slowdown.
After headlining the record rally, Nvidia stock has captained the latest slump.
Key Facts
“The AI tourists have started to depart,” Bank of America analysts led by Mariana Pérez Mora wrote in a Tuesday note to clients following earnings for analytics giant and defense contractor Palantir, one of the AI stocks immune to the recent slide, gaining 8% over the last month.
Shares of Nvidia, the Silicon Valley semiconductor chip architect and the most beloved AI stock for its dominance in designing the technology powering generative AI, are down 21% over the last month despite a recent bump, trading nearly 30% below their June peak Friday and losing about $700 billion of market value over the last six weeks.
Other trillion-dollar firms massively exposed to AI have struggled, too, with shares of cloud computing competitors Amazon and Microsoft down 16% and 12% over the last month, respectively.
Nvidia’s high-tech chip peers like Advanced Micro Devices (down 25% over the last month), Broadcom (-16%), Intel (-43%), Qualcomm (-21%) and Taiwan Semiconductor (-11%) have wavered.
So too have stocks of other smaller companies involved in producing technology powering generative AI, such as Lam Research (-28%), Marvell (-18%) and Super Micro Computer (-44%).
Crucial Quote
Comparing the AI investment pileup to the California gold rush in the mid-1800s, Pérez wrote: “We see both events characterized by hundreds of thousands jumping in with the hopes of making a fortune. While fortunes have been made in both cases, just like the gold rush, the ‘AI Rush’ appears to have run dry.”
Contra
The pullback unearthed a rare spot of value for pricy AI stocks for investors who still buy into the AI vision. Nvidia stock trades about 30% below its five-year average price-to-earnings ratio (P/E), which compares its market value to its projected future profits, according to Morgan Stanley research, and its P/E sits at nearly the same level it did in Nov. 2022, just prior to the launch of the ChatGPT generative AI chatbot which set forth the AI frenzy. The Morgan Stanley group led by Erik Woodring noted that the so-called magnificent seven, the septet of American technology behemoths including Apple, Microsoft and Nvidia, are trading at about a 7% discount compared to their average P/E valuations over the last five years. “Mag 7 valuations still face significant downside valuation risk in a black swan or recession scenario,” adding “current Mag 7 valuations relative to future growth prospects are attractive after the recent drawdown,” according to Woodring.
Key Background
Concerns about the prospect of a weakening U.S. economy escalated beginning last Friday when the U.S. unexpectedly reported its highest monthly unemployment rate in nearly three years. Tech stocks are historically sensitive to concerns about economic slowdowns, as they rely on high levels of external spending on products and internal expenditures to develop products, like new AI models. The weekend unraveling of the “carry trade,” in which traders borrowed at near zero interest rates in Japan and purchased riskier assets like American tech stocks, simultaneously crushed tech stocks, causing the magnificent seven to lose a whopping $650 billion in Monday trading.
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