Sep 17, 2024
Written by:
John McDowell
AI stocks have been in the limelight since the introduction of generative AI software and IT infrastructure solutions. Companies have been pouring billions of dollars into AI-related research and development to stay ahead of the competition. The generative AI market alone is expected to surpass $1 trillion within the next decade. As AI technology advances, companies are well-positioned to benefit from the growing demand for AI hardware and software development.
This blog discusses the current landscape of stock trading, focusing on how AI-driven stocks like Nvidia and Alphabet are performing amidst tech investment concerns. We also explore the effects of expected Federal Reserve interest rate cuts on dividend-paying and rate-sensitive stocks. With AI advancements, antitrust battles, and macroeconomic shifts, this post provides insights for traders on navigating current market conditions.
Given the explosive growth of AI technology and its rapid adoption across industries, technology and AI stocks are expected to deliver strong returns in 2024 and 2025. Let’s analyze two important stocks in the AI space, Nvidia and Broadcom Corp, to determine their investment potential and impact on the broader markets.
Nvidia stock has soared to historic highs over the years due to extraordinary results and strong fundamentals. It’s up 150% year-to-date and has gained a hefty 2,500% over the last five years. In January 2024, Nvidia briefly surpassed Microsoft to reach a market capitalization of $3.34 trillion, becoming the world's most valuable company. As of this writing, it remains the third most valuable company, outranking tech giants Google, Amazon, and Meta.
In its most recent second-quarter FY 2025 financial results, Nvidia reported $30 billion in revenue, with 122% year-over-year growth, primarily driven by the demand for data center chips. Of this revenue, around 88%—or $26 billion—came from the company’s data center business, including sales from AI chips and networking products. Major customers like Microsoft, Meta, Alphabet, and Tesla have contributed to this growth, leveraging Nvidia’s H100 and H200 GPU chips for generative AI, large language models, and scientific computing.
For the past three quarters, Nvidia has consistently generated year-over-year revenue increases exceeding 200%. Additionally, its net income reached $16.6 billion in the latest quarter—more than double the previous year. The company expects its current-generation Hopper chip to continue driving sales through the next two quarters.
Many Nvidia customers are eagerly awaiting the release of the company’s next-generation Blackwell chip, which, according to the CFO, will contribute to sales starting in Q4. Nvidia’s gross margins have consistently ranged in the high-70% range, which is expected to stabilize in the mid-70% range in upcoming quarters.
Given its dominant position in the AI hardware market, Nvidia is an attractive buy for those looking for exposure to AI stocks. Although some analysts argue the stock may be overvalued due to its extraordinary rise, the demand for AI-related chips is expected to remain robust as tech companies race to dominate the AI space. However, risks remain as companies like Alphabet, Amazon, Apple, and Microsoft are developing their own chips, potentially threatening Nvidia’s revenue streams.
Broadcom is another major player in the semiconductor space, competing with Nvidia, Intel, and AMD. While Broadcom has made strides in AI-related processors, its core products include the manufacturing and designing of wireless, storage, broadband, and wired communication chips. It also offers a wide portfolio of semiconductor and infrastructure software and enterprise solutions.
In its earnings conference call for its Q3 2024 results, Broadcom’s management mentioned a strong growth in sales of Custom AI accelerators that grew three and a half times year on year. Additionally, the sales of Ethernet switching during the quarter also grew over four times year on year, while the sales of optical lasers grew three-fold.
Encouraged by significant demand for its custom AI chips, Broadcom’s management foresees AI revenue to grow sequentially by 10% in Q4 to over $3.5 billion. This would take fiscal year 2024 AI revenue to reach $12 billion, up $1 billion from the previous estimate of $11 billion.
With analysts and company management predicting encouraging growth in both AI and non-AI revenue in the next four to five years, Broadcom should be a stock to watch. Other quality companies on worth watching include Qualcomm, Texas Instruments, and Intel.
Rate-sensitive stocks refer to companies whose stock performance is influenced by interest rate changes. Sectors typically affected by interest rate fluctuations include:
The sensitivity of stocks to changes in interest rates depends on their business models, the portion of debt in their capital structure, and their dependency on interest income, among other things. For example, banks benefit from high interest rates due to increases in their net interest income. At the same time, demand for borrowing may decrease due to high borrowing costs resulting from a rise in interest rates. Insurance companies invest a significant portion of their premiums in interest-bearing assets, and benefit from high interest rates.
Auto manufacturers, retailers, homebuilders usually benefit from lower interest rates because low interest rates make borrowing cheaper, allowing consumers to spend more on buying cars and purchasing consumer goods and profit from the rise in demand. Similarly, materials stocks could benefit from cuts in interest rates because lower borrowing costs spur economic activity and increase demand for construction and manufacturing materials, chemicals, metals, and minerals used in construction.
With the Federal Reserve poised to cut interest rates in September 2024 for the first time since 2020, consumer cyclicals and materials stocks are the most likely beneficiaries of the rate cuts. But no two businesses are the same, and interest rate cuts might impact two businesses even in the same sector differently as plenty of other factors also come into play.
In August 2024, Google was found guilty of breaching antitrust laws by striking multi-billion dollar deals with Apple and Samsung for keeping Google Search as the default search engine on their devices. The judge ruled that Google built an illegal monopoly in the online search industry. However, the ruling did not slap any penalties on Google, and neither did the government enforce any remedies for Google’s wrongdoings. Google plans to appeal the ruling, and it’s less likely that Google’s search engine way of working would change any time soon, at least until the court decides on the appeal.
After a month since the first antitrust case ruling, Google is again in the dock to face the second antitrust case. The Department of Justice claims that Google is indulging in anti-competitive practices as it monopolizes the digital advertising industry. Google acquired several ad companies like DoubleClick, Invite Media, and AdMeld, which enabled it to act as a middleman between advertisers and online publishers. The fact that Google charges commissions from both parties, the advertisers and publishers, and works on both sides of the market gives it an undue advantage. It can charge advertisers more while paying less to the publishers, while at the same time wielding its influence through its dominant position in the industry.
If the antitrust cases make Google alter its search engine workings and roll back its advertising suite (Google Ad Manage suite), it could result in Google losing some market share to its competitors. However, Google still has plenty of options on the table to minimize the potential adverse impacts of the rulings.
Interest rate cuts are generally considered favorable for dividend-paying stocks for several reasons. When the central bank cuts interest rates, yields on fixed income securities such as bonds and certificates of deposits drop. In a low interest rate environment, dividend stocks usually have higher dividend yields than fixed income securities, making them more attractive than bonds, treasury bills, and certificates of deposits. Although the resultant additional demand for dividend stocks push the stocks’ prices higher and lower their dividend yields, investors can reap capital gains as well as periodic dividends.
Interest rate cuts are also particularly favorable for Real Estate Investment Trusts (REITs) that are legally required to pay out 90% of their taxable income to shareholders. Further, debt constitutes a sizable portion of their capital structure, and in the event of interest rate cuts, can result in reduction of interest expenses due to refinancing of debt. In such a scenario, their stocks can appreciate while providing investors with growing dividends as well.
Big technology companies, such as Apple, Alphabet, Meta, Amazon, and Microsoft, have been investing heavily in AI-related R&D to tap into the relatively new AI market. Alphabet and Microsoft have launched their generative AI language models Gemini and Open AI’s ChatGPT, while Amazon and Google have been using it for their cloud computing offerings. Virtual Assistants like that of Apple’s Siri, Amazon’s Alexa, and Google’s Google Assistant all operate using AI models. Recently, Apple has rolled out Apple Intelligence on its smartphones in collaboration with OpenAI, which will allow users to benefit from all the generative AI features of ChatGPT in performing different tasks on their phones.
Fortunately, the investments of big technology companies in AI have paid off, with various successful products like ChatGPT, Gemini, cloud computing and cloud AI offerings. Semiconductor companies are also contributing by providing the chips and processing power to tech companies to keep their products up and running. In short, the AI market is booming, with big tech companies and semiconductor companies like Nvidia in leading positions.
AI-enabled smartphones harness the power of artificial intelligence to improve the speed, accuracy, and efficiency of almost every type of activity we do on our smartphones. Generating images from text, editing and improving picture quality, generating different types of texts using generative AI, analyzing data, AI virtual assistant, image and audio-based search, transcription, live translation, etc. all use AI in different forms.
Investors who want to invest in AI and become part of the growth in AI-enabled iPhone smartphones can consider investing in Apple stock, semiconductor stocks like Nvidia, Qualcomm, TSMC, Sony, etc whose GPUs, chips, sensors, and processors are being used in Apple devices, or AI software companies like Adobe who provide software for some key functionalities of the iPhone. Alternatively, investors can also consider some AI-specific ETFs like ARK Innovation ETF (ARKK) and Technology Select Sector SPDR Fund (XLK), which is a cost-effective method of having exposure to key AI stocks.
Interest rate cuts generally have a positive impact on stock trading. Investors are always on the lookout for earning higher returns while undertaking as low a risk as possible. In the event of rate hikes, bonds become more attractive as they offer higher returns at comparatively low risk. In contrast, when rates are cut, bonds usually become less attractive for investors as bonds’ yields fall. Investors, therefore, turn to stocks as alternatives to bonds and certificates of deposits in an effort to extract higher returns, albeit with taking a little extra risk.
Interest rate cuts enable companies to raise debt at a lower rate, allowing them to expand their operations and carry out large capital intensive projects using borrowed money. This is particularly helpful for real estate and utility companies who often have high levels of debt on their balance sheets. Refinancing debt also becomes lucrative in a low-interest rate environment as it allows borrowers to lower their interest expense. Increased consumer spending due to cheap credit generally bodes well for businesses across the board, with particular sectors like consumer cyclicals benefitting the most. Stock traders can also access loans at cheaper rates and use the money to invest in stocks to generate higher returns.
When the Federal Reserve slashes interest rates, it is usually a signal for an expansionary monetary policy. The lowering of interest rates act as a stimulus for generating more demand for products and services, resulting in growth in the GDP. However, prolonged lowering of interest rates can overheat the economy and result in inflationary pressures.
AI has taken the world by storm, and companies big and small are vying to establish themselves in this new and exciting market. With AI technology still in its early development phase, there is plenty of room for growth and investment opportunities for investors. Companies like Nvidia have already provided its investors with spectacular returns over the past few years. And with the interest rate cuts in sight, not only tech stocks but stocks in other sectors of the market might also benefit from it, providing investors with many profitable investment opportunities.
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