Author: Wu Bin
Editor: Li Yingliang
Image Source: AI
After a round of staggering growth, signs of fatigue are emerging in both the artificial intelligence frenzy and the surge in the U.S. stock market, with the once dominant engines losing their edge.
On April 9th, NVIDIA plummeted by about 5% intraday, ultimately closing down over 2% at $853.54, shedding over $100 from its peak. Since the peak of the AI frenzy at the end of February, AI concept stocks in the U.S. stock market have been treading water for nearly six weeks. As April unfolds, signs of "stalling" have also emerged in the Nasdaq, with overall declines so far this month.
As tech stocks gradually return to normal performance, cyclical stocks are on the rise, buoyed by economic data, bringing relative balance to the upward trend in the U.S. stock market. Zhao Wei, Chief Economist at Guojin Securities, told 21st Century Business Herald reporters that after a two-year decline in global manufacturing since 2021, global manufacturing has bottomed out and rebounded since the second half of 2023. The recovery trend is gradually becoming clear, with the global manufacturing PMI rising from 48.6 in July 2023 to 50.6 in March 2024, consistently above the boom-bust line for the past three months.
From various indications, market breadth indicators are clearly improving. Ryan Detrick, Chief Market Strategist at Carson Group, stated that the key to a bull market is sector rotation, and we are now seeing some funds shifting from tech stocks to some cyclical stocks. The number of S&P 500 index components reaching 52-week highs recently hit 118, the highest in three years, indicating an improvement in market breadth.
"Losing Blue Ocean Dominance, Nvidia Faces Intense Competition"
As the self-proclaimed "most important stock on earth," Nvidia's dominant position is not without risks, with its once-blue ocean beginning to turn red.
On April 9th, Intel unveiled its latest artificial intelligence chip, the Gaudi 3, set to be widely available to customers in the third quarter. Companies including Dell, HP, and Super Micro Computer are expected to adopt the Gaudi 3 chip. Intel claims that compared to Nvidia's H100 chip, the new Gaudi 3 chip boasts an average 50% improvement in inference capabilities, a 40% increase in energy efficiency, and runs AI models 1.5 times faster than the H100. The Gaudi 3 is expected to be roughly on par with Nvidia's latest H200 and even outperform it in certain areas.
Das Kamhout, Vice President and Senior Chief Engineer of Intel's Cloud and Enterprise Solutions Division, anticipates that the Gaudi 3 will pose a strong competition against Nvidia's latest chips, stating, "We believe this is a powerful product given its competitive price, unique open integrated network, and use of standard Ethernet." Intel CEO Pat Gelsinger also admitted that earlier versions of Gaudi failed to achieve the market share growth Intel had hoped for, but he expects the new version to have a greater impact.
Nvidia is facing increasingly fierce competition in the field of artificial intelligence. Brian Colello, a stock strategist at Morningstar, acknowledges Nvidia's dominant position in the market but notes that other tech giants are certainly striving to compete. Moreover, Nvidia could face setbacks if the economy slows down; reductions in GPU spending by customers like Microsoft could pose trouble for Nvidia, as investors have high expectations for the company.
There are already some bearish voices in the market. DA Davidson analyst Gil Luria expresses skepticism about Nvidia's staggering valuation, suggesting that Nvidia's huge surge may soon come to an end, with the stock potentially dropping by up to 20% by the end of this year. Luria rates Nvidia as "hold" with a target price of $620. "Major Nvidia customers like Microsoft and Amazon are stockpiling GPUs, but as they reach the desired quantities, tech giants may not continue purchasing in large volumes in the coming years."
Can Nvidia Hold onto the Throne?
With over 200% revenue growth in a year, Nvidia's data center business now constitutes more than three-quarters of the company's total revenue. While Nvidia cannot sustain such growth indefinitely, Wall Street generally expects strong revenue performance in the coming years.
Despite recent loss of momentum in Nvidia's stock price, dropping over 12% from its historical peak, many institutions view this as a normal correction.
For instance, KeyBanc maintains a buy rating on Nvidia, raising its target price from $1100 to $1200. They believe Nvidia's stock should continue to rise barring any factors that could disrupt the overall semiconductor industry recovery, likely reaching the target price in about a year.
Zhang Zhuran, Chief Researcher at Shanghai Zemu Family Information Technology Co., Ltd., told 21st Century Business Herald that a moderate correction in Nvidia's stock price is normal after the previous surge, indicating overcrowding in previous investment channels and not necessarily signaling major issues in the AI industry. Even after the correction, Nvidia's year-to-date cumulative gain remains as high as 72.36%.
In fact, shaking Nvidia's dominance is no easy task; its position remains quite solid. Currently holding an 80% share of the AI chip market, Nvidia is an absolute leader. Over the past year, Nvidia's GPUs have been the preferred choice for high-end AI chips.
Tejas Dessai, a research analyst at Global X ETFs, told 21st Century Business Herald that we are witnessing a transformative era. In the coming years, data centers will replace trillions of dollars' worth of chips to accommodate the development of generative AI, providing Nvidia with a massive potential market. Nvidia's leading position in high-end AI chips is expected to dominate the market well into 2030.
Moreover, Nvidia's extensive product line greatly enhances its profitability. Dessai notes that in addition to hardware, Nvidia's CUDA platform helps solidify its position, defend market share, and build stickiness and loyalty.
Future demand for AI chips will also support Nvidia's performance. Dessai analyzes that large-scale cloud companies, nations, and large enterprises clearly have enough demand to purchase more chips, with chip demand expected to remain high for at least the next three to four quarters before signs of slowing growth appear. Additionally, the possibilities for AI chips extend far beyond data centers; chips will eventually enter areas such as smartphones, laptops and devices, IoT systems, robotics, medical devices, automobiles, and beyond, providing ample space for smaller companies to capture and serve the market.
"Searching for the 'Next Batch of NVIDIAs'
While NVIDIA remains a dominant force in the foreseeable future, its previous astounding gains suggest that future exponential surges may be harder to come by. As the impetus from artificial intelligence engines wanes, there is considerable divergence in the market's outlook for US stocks.
According to Wells Fargo, the current bull market in US stocks is propelled by the long-term growth of artificial intelligence and the concentration of holdings in component stocks. This has led investors to prioritize growth and discount metrics over traditional valuation indicators. Fueled by long-term optimism, investors are increasingly willing to accept higher valuation thresholds and extend investment horizons, indicating some upward potential for the stock market at its current levels.
However, representing the pessimistic camp, Albert Edwards, global strategist at Societe Generale, warns that the US stock market is reflecting a historic bubble, with the current market frenzy reminiscent of the tech bubble over two decades ago, suggesting a significant market correction may be imminent.
Some argue that artificial intelligence will drive a surge in corporate profits and support current high valuations. But Edwards notes that optimism and corporate profit expectations are cooling off, with the proportion of companies in the S&P 500 where analysts are raising earnings expectations falling below 50%.
Following the meteoric rise of AI frontrunners, the market is eagerly seeking the 'next batch of NVIDIAs.' Anton Levy, Chairman of the Global Technology sector at General Atlantic, describes the current AI investment frenzy as 'large-scale infrastructure development,' believing it will bring greater investment opportunities to the 'application layer.' "The market size of application layer opportunities far exceeds that of infrastructure development, offering the greatest value creation opportunities for growth-oriented investors. The upcoming AI innovation cycle will be no different, presenting unprecedented opportunities for equity growth investment over the next decade."
Major Wall Street players are taking action, with Goldman Sachs' asset management division delving into stocks of AI supply chain component manufacturers, such as cooling systems and power supply stocks; J.P. Morgan Asset Management favors traditional electronics manufacturers transitioning into AI leaders; and Morgan Stanley investment managers are betting that AI is reshaping business models in non-tech industries.
Bank of America analyst Vivek Arya suggests that while AI-driven trading benefits chip manufacturers like NVIDIA and Broadcom, there are still some "second-tier winners" poised for further gains. The rising tide may create profitable niche markets for the next tier of suppliers, heralding the onset of a second wave of AI frenzy.
Looking ahead, Dessai told reporters that the consumption of AI infrastructure bodes well for cloud infrastructure companies and AI software manufacturers. With GPU computing power continually increasing, it is expected that enterprises will accelerate the adoption of AI software and applications in the future.
SFC
Editor of this issue: Liu Xueying, Intern: Huang Lihong
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