(Bloomberg) -- Skeptics had long warned that artificial intelligence-related stocks were in a bubble. Now that some of the froth has come off, bulls see an opportunity.
Shares in makers of AI hardware and infrastructure — including Dell Technologies Inc., Super Micro Computer Inc., ARM Holdings Plc. and Nvidia Corp. — have come under huge selling pressure in recent months, bringing their valuations back down to earth. And with most of their big customers planning to continue spending billions of dollars on AI, some say that it’s time to selectively get back in.
“The AI moves were certainly dramatic, but they’ve moved back to where they can stabilize for the balance of the year,” said Rob Sluymer, technical strategist at RBC Wealth Management. “Momentum indicators have gone from overbought to oversold, and now that positions have been unwound, there’s an opportunity for traders to take positions.”
The combination of lower multiples and enduring AI demand — demonstrated by Taiwan Semiconductor Manufacturing Co.’s robust July sales — suggests that the worst may be over for AI hardware. And there are already signs of a rebound: Nvidia shares are up 17 per cent from an August low, while Bank of America Corp.’s most recent client data showed inflows into tech for the first week in four.
“The excess appears to be wrung out,” according to Truist Advisory Services co-chief investment officer Keith Lerner. He recently upgraded tech stocks, writing that “in a cooling economic environment, we expect investors to come back to tech given some of the secular tailwinds stemming from artificial intelligence and its premium growth prospects.”
Upcoming results from Dell and Nvidia will be a crucial test of whether the selloff is really over. Dell, which became a market darling because of its high-powered servers that can run AI workloads, saw its stock plunge more than 50 per cent from a May high to last week’s low, leaving its forward earnings multiple cheaper than the S&P 500.
“The euphoria in Dell has come off, and it is a real, diversified business that has long demonstrated consistent earnings growth, which makes it a more attractive way to play the space,” said Derek Schug, head of portfolio management at Kestra Investment Management. Analysts at Barclays agree — they upgraded the stock on Tuesday, saying the selloff has removed AI hype from the valuation.
Still, there’s an ongoing debate about how to value the future AI opportunity for hardware names. That’s been encapsulated by data center server maker Super Micro, which more than quadrupled in market value in the first weeks of 2024 before the shares collapsed almost 60 per cent as investors questioned whether the move was justified.
The company’s quarterly report last week offered fodder for both bulls and bears. While results missed estimates, causing a sharp selloff, its sales forecast for the year blew past expectations. The shares, which are now trading at less than half of their 2024 peak of more than 40 times forward earnings, have been bouncing back for the past few days.
But even after the recent selloffs, some may see AI hardware valuations as too steep. Arm is the most expensive stock in the Nasdaq 100 in terms of forward sales, while Nvidia is in third place.
And with customers like Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. under pressure to show that their AI investments are paying off, there are concerns that spending may slow in future quarters.
Current capex plans bode well for AI-related hardware, but “there has been greater skepticism around the near-term return on investment from the massive increase in capex, essentially creating worries of a demand ‘cliff’ in the next 12-18 months,” according to DJ Cross, portfolio manager at American Century Investments.
“We will likely have to live with the increased volatility.”
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