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Artificial Intelligence Fuels Tech Stock Surge: Correction on the Horizon?

INVESTINGArtificial Intelligence Fuels Tech Stock Surge: Correction on the Horizon?

Artificial intelligence has been the main driver of stock price increases for technology companies over the last 1.5 years. Companies are continually competing with new solutions and attempts to leverage AI to expand their business.

Investors have their favorite group of tech companies, known as the “Magnificent Seven,” a nod to the title of the famous Western movie. These companies include Alphabet (Google), Amazon, Apple, Nvidia, Microsoft, Meta, and Tesla, with Nvidia recently shining among them.

“Nvidia has jumped to the top of company lists in just under a year, currently quoted at very high levels, and its market capitalization has exceeded $2 trillion,” says Tymoteusz Turski, a stock market analyst at XTB, in an interview with MarketNews24. “Such dynamic growth is all the more surprising given its size. Typically, such significant increases are associated with smaller companies previously undervalued by investors.”

In the cloud services market, the main players remain three companies: Amazon with AWS (Amazon Web Services), Microsoft with Azure, and Alphabet with Google Cloud. Together, they account for about 65% of the market share.

Currently, Amazon holds the strongest position, with its revenues at the end of 2023 accounting for 31% of total sales in the segment. However, this situation may change as Microsoft’s Azure has attracted investor attention with its dynamically increasing revenues. In 4Q23, Microsoft’s cloud segment sales grew by 30% year-over-year, which is a 17 percentage point higher growth rate than Amazon.

Even more impressive is the growth rate of Microsoft’s cloud business profitability. The company reported a 40% year-over-year increase in operating profit.

Alphabet’s Google Cloud also performed well in the last quarter of the year, growing by 25% year-over-year, thus breaking a streak of 10 quarters of declining growth dynamics.

“The gains in the ‘Magnificent Seven’ group and others are starting to resemble the situation twenty years ago when the speculative internet bubble burst,” comments an XTB expert. “The situation is similar in terms of indicators such as the price-to-earnings ratio, while indicators related to financial flows are growing much slower. Investors are therefore very wishful about the market situation.”

Investors are looking to the future and believe that profits will be much higher. However, unlike the bubble, companies like Nvidia are showing real profits. A speculative bubble burst can never be ruled out, but the fundamentals are significantly better than they were twenty years ago.

However, there is a possible scenario that the time of disappointment may come. A warning signal could be what is happening with Tesla’s stock price, which has not delivered the promised results and has experienced a significant drop.

“The benefits that artificial intelligence may bring in the future are difficult to assess,” adds Tymoteusz Turski. “Investors value that artificial intelligence will be a milestone in technological development. If they are right, then it may turn out that the current stock price increases were still too small.”

These considerations relate to a long-term approach, but in the short term, decisions by the Fed regarding interest rate cuts will be important for investors. Just 2-3 months ago, the market was 80% certain that the first cuts would be in March, which weakened bond yields, and now it is April and it is unclear whether the cuts will happen in June, or only in August or September. Meanwhile, yields have returned to 4% levels.

Less impressively than expected was the market’s reaction to the attack by Iran on Israel. A few days after the event, many indications suggest that this could be the end of the escalation between Israel and Iran, but the lack of intent for another provocation by Iran is hard to take into account.

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