Artificial intelligence has breathed 'second life' into the powerfully oversold Nasdaq index until recently. Known for its large share of technology companies, the index last year suffered its biggest declines since the bursting of the Internet bubble. The year 2023 brought an unexpected turnaround, with bulls returning to technology en masse. The reason? The breath of fresh air associated with artificial intelligence. The fuel for the increases was provided today by Nvidia, which, after a nearly 400% unprecedented rally from its October low with nearly $1 trillion in capitalization, was ranked 5th among the highest valued US listed companies. Following the financial results, Nvidia shares recorded the largest one-day increase in market capitalization in the history of the US stock market. The company's valuation rose by a staggering $200 billion in just one day.
The global game around artificial intelligence is gaining momentum, and companies in the tech-saturated Nasdaq 100 index are experiencing a real spring up on the back of increased demand for advanced semiconductors that enable the scaling of computing power used in so-called neural networks. The trend, which has been going on for several months, received a new shot of fuel today. The stock market loves technological innovations that fire the imagination of speculators, and the previous dot-com boom fueled by the invention of the Internet may be a clear example of this. Abstract things and breakthrough inventions are difficult to price through which (as history has shown) markets tend to fall into extreme states. From panic to great euphoria. Although the AI trend was 'born' in macro circumstances unfriendly to market novelties (lower liquidity, high interest rates, difficult access to more expensive external financing) it blooms like a flower growing in the desert.
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In 2022, the semiconductor sector was one of the biggest losers as investors priced in risks caused by geopolitical factors and a slowdown in the cloud and gaming sectors. Threatened by Chinese military aggression, Taiwan - the center of global production of high-performance integrated circuits - and the US-China economic war appeared in the background of last year's declines. Its aftermath is the unprecedented sanctions imposed by the US on China, in what we can see as a decisive move to secure US technological dominance. Without access to the latest technologies and chips made in 5nm and 3nm technology, it will be extremely difficult for China to compete with the 'West' in terms of AI development. But the market has stopped caring about geopolitics.
What we are observing today is probably only the 'first round', and the ultimate winner of the whole AI game is not yet known. However, the stock market has seen the semiconductor sector as the most 'obvious' beneficiary of AI. While software or technology platforms may 'fail' and lose out to the competition, the demand for chips seems almost obvious if global computing power were to increase.
Additionally, the largest chip companies have an advantage.Building new precision industry factories and redirecting logistics supply chains is extremely expensive and could probably take years. This, among other reasons, is why competition for the likes of Nvidia, AMD, Intel and other giants in the sector is not even visible on the horizon. Just as during the Klondike Gold Rush, it was those selling the proverbial picks and shovels who made the most money, so now the market has seen an opportunity for chips. Weakness in gaming, a slowdown in cloud computing and even the risk of conflict in the Taiwan Strait have gone by the wayside. Where does Wall Street cover its greatest hopes?
Nvidia - the favorite of the bulls
For many months, the favorite of the bulls has been Nvidia. It is in it that the markets see the main global beneficiary of higher demand for high-performance chips. The stock market is willing to 'overpay' for its shares because future forecasts look extremely optimistic. The company has indicated that it has started production for the AI sector early enough - as early as August 2022. Three months before the public release of ChatGPT 3, it was preparing to meet market demand. The company supplies super-performance graphics processing units (GPUs), massively used in data centers. Commenting on its Q1 results, the company cited a number of business advantages, described the current time as a computing revolution, and highlighted 'charging demand' for solutions in AI applications.
Along with the valuation of its shares, AMD, Intel, Arista Networks are also gaining, but not only - the wind has caught in the sails of almost all companies that stand to gain from AI. Competition between major BigTech companies like Microsoft and Google, which are outdoing each other in perfecting language models, and the breakthrough capabilities of generative artificial intelligence herald a real breakthrough both in terms of technology and business. Keep in mind, however, that the real euphoria over AI has only lasted a few months so far, and the market can be capricious. It is possible that sentiment will shift 'from company to company' depending on technological innovations and milestones. Has Nasdaq caught on to the next revolutionary tool being compared to the Internet? It's very likely.
Eryk Szmyd, XTB Financial market analyst
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