In February, investors withdrew from technology stocks, with concerns that artificial intelligence (AI) could disrupt traditional industries triggering market volatility. The Nasdaq Composite Index fell more than 4% over the past month. However, Wall Street strategists believe significant divergence within the tech sector is imminent in the short term.
Nancy Tengler, CEO of Laffer Tengler Investments, highlighted a stark contrast between the earnings reports of two companies: NVIDIA Corp. (NVDA.US), which her firm holds, and Salesforce, Inc. (CRM.US), which it does not. Tengler views the roughly 5% pullback in NVIDIA's stock following its quarterly report last Wednesday, coupled with its sideways trend this year, as a buying opportunity. She pointed out that hyperscale companies like Microsoft Corporation (MSFT.US), Meta Platforms, Inc. (META.US), Amazon.com, Inc. (AMZN.US), and Alphabet Inc. (GOOGL.US) are projected to invest approximately $650 billion this year in building AI data centers powered by NVIDIA's chips, suggesting its current valuation remains attractive. "The signal we are getting from all the supercomputing players is that computing power is in short supply, and that is the source of revenue growth," Tengler explained. "One company's capital expenditure is another company's revenue—NVIDIA is the latter."
In contrast, regarding Salesforce, Tengler revealed her firm had previously held the stock but sold its position long ago. "We don't see a growth trajectory," she stated plainly, adding that "there are better choices in the market." In fact, many investors have recently begun questioning whether clients of Software-as-a-Service (SaaS) companies might shift towards developing their own solutions using large language model AI tools like Anthropic's Claude Code, thereby reducing their reliance on providers like Salesforce.
More critically, if AI enhances productivity and reduces workforce size, it could directly impact the software industry's traditional "per-seat" pricing model. "Selling software per seat is inherently linked to the job market," Tengler analyzed. "Therefore, we have chosen to allocate capital to other areas." Goldman Sachs economists predict the unemployment rate will rise from 4.3% to 4.5% this year, noting increasing risks of job displacement due to the accelerated adoption of AI.
Melissa Otto, Head of Research at S&P Global Visible Alpha, suggested that more attractive opportunities currently lie in the memory chip sector. As a core component for AI workloads, memory chip prices are soaring due to supply constraints. "Memory stocks have performed spectacularly," Otto noted. "They have lower valuations but surprisingly strong upward revisions to earnings estimates, reminiscent of NVIDIA two years ago." Memory giants Micron Technology, Inc. (MU.US), Western Digital Corp. (WDC.US), South Korea's SK Hynix, and Samsung Electronics Co., Ltd. (SSNLF.US) have collectively surged 60% year-to-date. In comparison, the iShares Expanded Tech-Software Sector ETF (IGV.US) has fallen 24% since January.
Overall, while strategists believe last month's sell-off may have been overdone, most are reluctant to declare that the market has bottomed. Analysts at Goldman Sachs noted in a recent report that it is difficult to disprove market fears in the short term regarding AI's potential impact on data-intensive industries such as software, media, education, and business services. Goldman Sachs analysts Ryan Hammond and his team stated, "We expect investors will likely need either several consecutive quarters of evidence demonstrating the resilience of these companies' businesses, or a significant decline in their valuations relative to other market sectors, before aggressively buying these stocks again."
Comments