One of the byproducts of the accelerating adoption of artificial intelligence (AI) has been the investor practice -- for better or for worse -- of viewing AI stocks collectively. In many instances, developments concerning one company in the space can have a ripple effect, bringing a broad cross-section of stocks in the space up or down with them. That appears to be the case Monday morning, as two developments seem to be having on outsize impact on AI companies.
With that as a backdrop, foundry Taiwan Semiconductor Manufacturing (TSM 1.26%) tumbled 4.1%, social media company Meta Platforms (META 0.43%) slumped 4%, chipmaker Advanced Micro Devices (AMD 2.37%) dropped 3.8%, computer memory specialist Micron Technology (MU 2.92%) declined 3.1%, and semiconductor specialist Broadcom (AVGO 3.84%) fell 1.9%, as of 1:32 p.m. ET on Monday.
A check of all the usual suspects -- regulatory filings, financial reports, and changes to analysts' price targets -- turned up one piece of negative company-specific news -- while surprisingly, there were a number of positive catalysts (more on that in a bit). Furthermore, troubling news about a high-profile company in the space seemed to put AI investors in a dour mood.
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A one-two punch
Broadcom released the results of its fiscal 2024 first quarter (ended Feb. 4) on Friday, and investors weren't particularly impressed. The semiconductor specialist generated revenue of $11.96 billion, an increase of 34% year over year, resulting in adjusted earnings per share (EPS) of $10.99, an increase of 6%.
While both metrics exceeded Wall Street's expectations, management's forecast seemed to catch investors off guard. Broadcom reiterated its outlook for the 2024 fiscal year, guiding for revenue of $50 billion. Investors were hoping the company would boost its guidance after exceeding expectations for the quarter. The news weighed on many AI and chip stocks on Friday.
Investors seemed to be waiting for the other shoe to drop, which happened over the weekend. Reports emerged that a proposed class action lawsuit was filed late on Friday, accusing Nvidia of copyright infringement. Three authors sued the chipmaker, alleging that Nvidia had used their books -- along with hundreds of thousands of others -- to train its NeMo AI platform, and had not requested permission. As one of the undisputed beneficiaries of the adoption of AI, this development will be carefully watched by investors.
This is merely the latest in a growing number of lawsuits filed by writers claiming that copyrighted works have been used to train generative AI systems without their knowledge or consent. Late last year, a group of noteworthy authors -- including George R.R. Martin, Michael Connelly, and Jonathan Franzen -- filed a similar suit against Microsoft and OpenAI, charging that ChatGPT was trained on their copyrighted works. Meta Platforms is in the midst of a similar lawsuit regarding its LLaMA AI model.
While these lawsuits are currently having a chilling effect on the development of generative AI, it's too early to tell how these cases will ultimately be decided.
There's good news
While it's understandable that investors might be concerned about these developments, not all the news is bad. In fact, there were some positive bits of company-specific news, and investors appear to be missing the forest for the trees.
Here are a few examples:
- On Friday, Wells Fargo analysts maintained an overweight (buy) rating on Micron stock while raising their price target to $125, suggesting potential upside of 28% compared to Friday's close. The analysts believe the company is at an inflection point, which will become evident in the next two quarters.
- AMD also got a price target increase on Friday, courtesy of Melius Research. The analysts maintained a buy rating on AMD stock while raising their price target to $265, suggesting potential upside of 28% compared to Friday's close. They cited AMD's recently released MI300X AI chip as having good prospects in data centers.
- Broadcom got a pair of price target increases Monday morning. Baird maintained an outperform (buy) rating and raised its price target to $1,500, or upside of 19% compared to Friday's close. Citi analysts also maintained a buy rating on the stock and hiked its price target to $1,560, or 19% upside potential. Both analysts cited the secular tailwinds of AI as a catalyst fueling future growth.
These announcements suggest that investors should take care in painting all AI stocks with the same brush. While there will no doubt be both positive and negative developments that will impact the entire industry, each of these companies will need to execute on the opportunity and secular tailwinds represented by AI.
Meta Platforms and Taiwan Semiconductor are the least expensive among the group, selling for 32 times and 27 times earnings, respectively. Furthermore, when measured in terms of the price/earnings-to-growth (PEG) ratio -- which factors in strong growth -- both stocks clock in at less than 1 -- the standard for an undervalued stock.
Each of these stocks represents an intriguing opportunity, particularly in light of the opportunity represented by AI, but investors should size their positions based on their risk tolerance and the degree of volatility they're willing to endure.
