Technology investors had gotten used to a good thing -- positive momentum that seemed unstoppable. Giants in the industry led the Nasdaq to two years of double-digit gains -- and the individual stocks themselves offered shareholders mind-boggling returns. For example, Nvidia (NVDA +1.13%), the world's leading artificial intelligence (AI) chip designer, saw its stock surge 1,600% over the past five years, and Palantir Technologies, an AI-driven software player, advanced more than 800% since its 2020 market debut. And that's just to mention two of the standout players. Many others also generated great gains for investors.
Why such outstanding performance? Investors piled into these stocks on optimism about the future of AI, a technology that could join others like electricity or the internet on the list of "game changers." That's because AI offers the potential to save time, energy, and costs for companies -- and even lead to new discoveries.
In recent weeks, though, various headwinds weighed on stocks in this dynamic field. Investors worried about U.S. export controls on chips to China, the U.S. implementation of tariffs to three major trade partners, and general uncertainty about the economy. All of this has led the Nasdaq to a decline of more than 7% over the past two weeks as some of its biggest members tumbled. But before you turn your back on the tech sector, hold on. Here are three reasons tech investors shouldn't worry too much about the recent declines in AI stocks.
Image source: Getty Images.
1. The headwinds look manageable -- and temporary
As mentioned, one major theme weighing on the market is President Donald Trump's 25% tariffs on imports from Mexico and Canada and a 20% tariff on imports from China. Tech companies produce many of their parts and products outside of the U.S., meaning they could soon face higher prices.
The White House says the tariffs are in response to a flow of lethal drugs into the U.S. and noted that the move was "until the crisis is alleviated." We don't yet know how long the current trade war will last, but this is an initial sign that the tariffs are temporary.
So, yes, the tariffs represent a challenge today, but some of the world's biggest and highly profitable tech players such as Nvidia or Apple should be able to manage these times -- and succeed over the long term.
As for export controls on chips to China, these may not be temporary, but they might be manageable. Implemented in 2022, they already have reduced Nvidia's sales in that country by half compared to pre-control days, but Nvidia still delivered worldwide triple-digit growth to $130 billion, a record, in the latest fiscal year, showing the problem hasn't been disastrous for earnings.
Of course, before investing in a chip player, it's important to see exactly how dependent the company is on China. But if, like Nvidia, it's growing significantly through sales in other parts of the world, the player still may make a great investment.
NASDAQ: NVDA
Key Data Points
2. AI is in its early stages
Though the AI boom has already delivered billions of dollars in revenue to companies such as Amazon, Alphabet, and, of course, Nvidia, we actually are in the early days of this hot technology's story. Today's $200 billion AI market is expected to reach beyond $1 trillion by the end of the decade, which offers AI giants a lot of room for growth.
It's also important to remember we're still in the infrastructure build-out stage, with cloud service providers expanding data centers to meet demand and customers launching new AI programs. But at the same time, we're advancing into another key growth stage involving the application of AI to real world problems.
Here, AI agents, or software designed to solve a complex problem and put a solution into action, are ready to go to work at certain companies, streamlining their operations and boosting revenue. For example, in a call center, an AI agent may handle initial queries and questions. Providers of chips to power and design these agents and companies using them both should benefit from growth as this phase develops.
All of this means the AI opportunity is far from over, and many companies should continue generating significant revenue growth.
3. Signs from AI players have been positive
The positive signs, indicating investment and growth, have been piling up in recent weeks. Meta Platforms said it plans to invest as much as $65 billion this year to support its AI initiatives. The company aims to build a data center that's so big it would cover a major part of Manhattan, and Meta will end the year with more than 1.3 million graphics processing units (GPUs), or chips to power AI.
OpenAI earlier this year announced the Stargate Project, a project aimed at investing $500 billion over the coming four years to build out the AI infrastructure in the U.S.
And Nvidia recently said demand for its new Blackwell architecture was "extraordinary," and the platform generated $11 billion in revenue in its first quarter of commercialization.
These are just a few examples, but they reflect the general AI scene where investment and development continue at a fast pace and high level. As shown by the Blackwell revenue figure and through multibillion-dollar revenue at Alphabet and Amazon's cloud businesses, AI investments are bearing fruit.
This and the above two points mean now may not be the time to turn away from AI investing but instead to jump in and buy on the dip.
