One of the biggest driving forces behind the market rally that kicked off early last year has been the accelerating adoption of generative artificial intelligence (AI). However, after the big run-up, investors have taken a step back, looking for additional evidence that the trend still had room to run. Several developments on Wednesday confirmed that this secular tailwind was still going strong.
With that as a backdrop, chipmaker Nvidia (NVDA 1.56%) surged 11.4%, memory and storage chipmaker Micron Technology (MU +5.08%) jumped 7.7%, chip designer Arm Holdings (ARM +0.55%) rose 6.6%, semiconductor foundry Taiwan Semiconductor Manufacturing (TSM +0.42%) climbed 5.4%, and AI and database specialist Oracle (ORCL 2.60%) rallied 2.9%, as of 11:40 a.m. ET on Wednesday.
A check of all the usual sources -- regulatory filings, earnings results, and changes to analysts' ratings and price targets -- turned up little in the way of company-specific news to account for the positive sentiment (more on that in a moment). That said, several catalysts helped spark a rally that sent most AI-related stocks higher.
Image source: Getty Images.
Evidence AI has room to run
Earnings reports from two sides of the AI coin provided the latest indication that AI adoption is far from over.
First up was Microsoft (MSFT 1.57%), among the first movers in the AI revolution. The company reported after the market close on Tuesday, and while the results were better than expected, it was management commentary that helped light a fire under AI stocks today.
For the company's fiscal 2024 fourth quarter (ended June 30), Microsoft delivered revenue of $64.7 billion, up 15% year over year, resulting in diluted earnings per share (EPS) of $2.95, up 10%. For context, analysts' consensus estimates were calling for revenue of $64.4 billion and EPS of $2.93, so Microsoft surpassed expectations with room to spare.
CEO Satya Nadella addressed the ongoing shift to AI, saying it involved "both knowledge and capital-intensive investments." The chief executive went on to say that "nearly all of our total capital expenditures" were cloud and AI-related. This bodes well for companies that supply the chips that power AI technology, which includes all of our quintet of AI stocks.
NASDAQ: NVDA
Key Data Points
The results from Advanced Micro Devices (AMD 2.33%), also known as AMD, seemed to add weight to Nadella's comments. In the second quarter, AMD generated revenue of $5.8 billion, up 9% year over year, and adjusted earnings per share of $0.69. For context, analysts' consensus estimates were calling for revenue of $5.7 billion and EPS of $0.68, so AMD beat on both counts.
Perhaps more important, however, was the company's guidance. AMD now expects AI chip sales of $4.5 billion this year, up from a forecast of $4 billion just three months ago and $3.5 billion late last year.
Taken together, these factors helped to ease investor fears that the adoption of AI was losing steam, fueling a relief rally in the process.
Other catalysts
There were also a couple of company-specific developments in the space that helped add fuel to the AI rally.
- Morgan Stanley analyst Joseph Moore moved Nvidia back to the firm's "Top Pick" list, retaining a buy rating and $144 price target. This suggests additional upside of 39% compared to Tuesday's closing price. After enduring a 23% decline in recent weeks, the analyst believes the sell-off of Nvidia stock is overdone, calling its current price "a good entry point."
- Micron announced yesterday that it had achieved "volume production" of its ninth-generation NAND flash storage chips. The processors help move information around data centers more quickly and are an essential component of AI processing. Micron noted that these chips "deliver 50% faster data transfer" than any competing processor.
NASDAQ: ARM
Key Data Points
To be clear, investor excitement regarding the potential of AI has pushed valuations higher over the past year or so, though there's an argument that the key players are deserving of a premium, particularly given the potential upside ahead.
For example, Micron Technology, Arm Holdings, Nvidia, TSMC, and Broadcom were selling for 87 times, 84 times, 38 times, 24 times, and 22 times forward earnings, respectively. For value-minded investors, Oracle and TSM are the cheapest, but Nvidia still has the greatest potential, in my opinion, particularly given its track record of triple-digit growth over the past year. I also view Micron and Arm as solid picks.
Investors would do well to remember that the path of AI adoption will be traveled over years and decades, not weeks and months. As such, the most profitable strategy will be to find the best AI stocks you can and ride out the volatility.
