Artificial intelligence (AI) investments have been driving the market in the first half of 2024. Big tech companies and investors don't want to be left behind in a technology race that rivals the rise of the Internet and the steam engine. But the current winner of this frenetic race is Nvidia, a company that specializes in making the chips needed to train AI systems.
Led by Jessen Huang and founded 33 years ago, Nvidia has broken numerous records: it has tripled in value in the past 12 months, topped the S&P 500, surpassed Microsoft and Apple, and become the world's most valuable company with over $3.2 trillion. Since the release of the first ChatGPT model at the end of November 2022, which sparked the current AI fever, Nvidia's value has soared by 700%.
But Nvidia is not the only one whose value is soaring. Big tech companies are working hard to train their own AI models, and the stock market is supporting them. Microsoft is up 38% in the past 12 months, while Google's parent company Alphabet is up 57%. But the phenomenon is not limited to the United States. There are counterparts to Nvidia on European stock exchanges. ASML, the Dutch giant that makes machines that print microchips, has overtaken France's LVMH to become the most important company on the European market. And in Asia, Taiwan's TSMC rose 170% on the stock market in the first half of 2024, approaching a market capitalization of $950 billion and aiming to join the club of companies with a market capitalization of $1 trillion.
Investors have been backing the technology to create language and images, though it's not new. Its development is expected to revolutionize everything from pharmaceuticals by accelerating drug development, to advertising through hyper-personalization, to technology and computer programming to the oil industry. But with big tech companies breaking market capitalization records every week, the market is also expressing doubts: Will the technology pay off in corporate profits, or is the AI breakthrough just another version of the dot-com bubble of the 2000s?
During that time, the advent of the Internet and the proliferation of websites seemed destined to change everything. However, economic timing does not align with market timing. As a result, technology stocks crashed ahead of the big changes, leaving thousands of projects, some of them large, struggling to survive. A well-known example is Cisco, which makes equipment for deploying and connecting the Internet. The company, like Nvidia, is heavily backed by large third-party investments. Cisco's stock price rose from $5 in 1997 to $77 in 2000, to just $13 in 2002. It is now at $46.
On Friday, July 5, analyst Pierre Ferrague of New Street Research lowered his value forecast for Nvidia, claiming that the company's shares have already peaked. “Further increases would only come in a bullish scenario where the outlook for 2025 and beyond improves substantially, but I'm not yet convinced that such a scenario will come true,” he told Bloomberg. But optimism seems to be prevailing. Nearly 90% of analysts tracked by Bloomberg recommend buying the company's shares. “The results will take time, but they will come,” explains Flavio Muñoz, head of technology investments at Andromeda Capital. He believes it's unlikely that the technology will reach its full potential and bring long-awaited profits in 2024.
Companies are now rushing to order specialized chips to ride the wave of change, and the main supplier is Nvidia. Based in Santa Clara, California, the company established itself as a major manufacturer of graphics cards (GPUs) for video games. Over the years, these chips proved to be the most efficient for the kind of work required to train neural networks, the core of AI, because unlike regular processors called CPUs, they can perform multiple operations in parallel. The company unwittingly became a golden egg. Since then, Nvidia has perfected its products with AI in mind, and orders have skyrocketed. In the first quarter of this year, sales rose 262% on $26.044 billion in sales. And profits rose 628%, from $2.043 billion to $14.881 billion.
The frenzy is being fueled by members of the “Magnificent Seven” — Microsoft, Apple and Amazon — who need the processing power of Nvidia's GPUs to develop and run AI models on vast amounts of data. This explosive demand is what has propelled Nvidia to stock market stardom. But Big Tech isn't the only industry benefiting from this. AMD, which also designs graphics cards, has grown 18% so far this year, while Qualcomm, which makes chips for mobile phones, has grown 45%. Taiwan's TSMC, a leader in semiconductor manufacturing, has also seen its shares rise 70% and in Europe, ASML has soared 50% so far this year.
Danny Fish, technology portfolio manager at Janus Henderson, said the internet giants are crucial to the development of AI technology. “They are the only ones with the financial muscle and infrastructure to harness the potential of AI,” he said. UBS analysts categorize Nvidia and its competitors in the AI acceleration stage, which spans semiconductor design to chip design. “We encourage investments in companies at this stage,” the Swiss bank's investment team said, arguing that “there is a risk that concerns about overcapacity could lead to volatility, but this sector currently offers the most room for reinvestment and reasonable valuations.”
According to these experts, the remaining two phases of the AI value chain are intelligence and applications. These phases are led by companies that develop AI models, such as Open AI (phase 2), and companies that develop AI for specific sectors, such as cybersecurity or financial technology (phase 3). Currently, UBS believes it is safer to bet on the first part of the chain, facilitation, because it offers “a strong competitive positioning, better reinvestment margins, and reasonable valuations.”
But Andromeda Capital's Munoz says investors should also look at other stocks in this ecosystem with big growth potential, including memory makers that run data centers, such as South Korea's SK Hynix and U.S.-based Micron Technology, network infrastructure providers such as Broadcom and Cisco, and software and cybersecurity systems providers, such as Confluent and Snowflake.
Storm on the Horizon
Some managers, like David Azcona, chief economist at Beka Finance, warn that barriers could still be erected that would slow growth across the industry. The main risks, he says, are the lack of concrete investments promised earlier this year and the emergence of competitors. Matthew Brock, chief strategy officer at Janus Henderson, adds that AI is inherently a fairly small market, with only a few companies making the most revenue from it.
In fact, the Magnificent Seven alone account for 60% of the S&P 500's total return this year. On average, S&P 500 stocks are up 4.1% this year, while the index as a whole is up 14.5%. According to The Wall Street Journal, this imbalance is the largest since at least 1900. Munoz explains that many investors are waiting for the next move from the US Federal Reserve, which until last year could cut interest rates up to three times. “But now it seems they can't cut them even once.”
Ascona believes that growth will be more moderate in the second half of 2024. He believes that political uncertainty in the United States with the upcoming elections and a scenario of diverging interest rates with a possible fall in consumption and rising unemployment will make it difficult to replicate the gains experienced in the first half of the year in the coming months.
sign up For more English news from the USA edition of EL PAÍS, subscribe to our weekly newsletter.
