The work of one of the standard-bearers of the AI movement has set the stage for a broader setback in the field.
There’s no denying that recent advances in artificial intelligence (AI) are a long-term tailwind that will propel the market higher from early 2023 onwards. Companies and investors alike are keen to profit from the potential of these advanced algorithms to spark a wave of employee productivity. Despite that potential, these changes will occur over years and decades, not weeks or months.
Against this background, semiconductor specialists Nvidia (NVDA -3.89%) Chip designer, down 3.1% Arm Holdings (arm -5.85%) Memory and storage chip makers fell 2.9%. micron technology (MU -2.89%) It was down 1.4% as of 2:40 p.m. ET on Wednesday.
After checking all the usual suspects, including financial reports, regulatory filings, and analyst price target changes, we found very little news to explain the stock price decline (more on this later). This suggests that investors were paying attention. About his achievements as one of the standard-bearers of the AI movement.
Image source: Getty Images.
When robust results aren’t enough
super microcomputer (SMCI -14.03%)Also known as Supermicro, it is one of the best performing stocks in the AI revolution. The company, a maker of high-performance server and storage solutions key to the continued adoption of AI, has returned more than 700% in the past year, leading up to the release of its financial report. Those results were strong by almost any measure, but investors expected more and the stock price plummeted.
In Supermicro’s fiscal third quarter of 2024 (ending March 31), the company’s revenue was $3.85 billion, an increase of 200% year-over-year. This resulted in adjusted earnings per share (EPS) of $6.65, an increase of 308%.
A result of this size would be cause for celebration for most companies, but Supermicro investors were left disappointed with the results, as analysts’ consensus estimates were for revenue of $3.95 billion and EPS of $5.78. I felt that.
CEO Charles Liang explained the background to the results, saying Supermicro continues to “face supply chain challenges” and is struggling to build direct liquid cooled (DLC) servers that run generative AI models used by cloud infrastructure providers. He noted that it was difficult to obtain all the necessary components. Even in data centers. Liang said he expects supply chain issues to ease in the coming quarters.
Still, it wasn’t enough to satisfy fair-weather investors, many of whom dumped supermicro stocks to chase the next bright thing.
forest for trees
So what does this have to do with our three AI stocks? The short answer is: nothing. Investors have been buying up AI stocks over the past year and setting unrealistic expectations about the timeline for AI implementation.
- Nvidia offers graphics processing units (GPUs) that help train and use AI systems. These GPUs power AI adoption and are experiencing unprecedented demand.
- Arm Holdings designs the architectures upon which many of the most widely used semiconductors are based. The company receives royalties and license fees from companies that use its chip designs.
- Micron Technology makes flash memory and storage processors, which are necessary components for GPUs used in AI processing, so the company is also directly affected by the speed of AI adoption.
Within this group, the only company-specific news was about Micron, and the news was decidedly positive. The company announced in a press release today that it has “shipped the first critical memory” used in AI. Micron said the company is “validating and shipping high-capacity monolithic 32Gb DRAM die-based 128GB DDR5 RDIMM memory.” These chips are key components of high-performance central processing units (CPUs) used to run generated AI and machine learning in cloud computing and data centers, where the majority of AI is processed. This is good news and is not the reason for today’s low stock price.
When it comes to appreciation, there’s a saying that beauty is in the eye of the beholder. None of these stocks are particularly cheap, as measured using some of the most widely used valuation metrics.
Micron, Arm Holdings, and Nvidia currently trade at forward price/earnings ratios of 160x, 64x, and 33x, respectively, making Nvidia the cheapest of the three companies. On a sales basis, future sales for Arm, Nvidia, and Micron are 21x, 15x, and 3x, respectively, making Micron the most attractively priced. However, none of these metrics take into account current growth prospects.
Nvidia, Arm Holdings, Micron when measured using a forward price-to-earnings ratio (PEG) that takes into account the company’s current growth rate. all All of these are buys in my opinion, as they sport multiples of less than 1x, which is the standard for undervalued stocks.
AI adoption is still in its early stages and has a long way to go. However, as today’s market reaction shows, investing in AI is not for the faint of heart, and significant volatility is expected to continue, so investors should consider these factors. need to do it.