AI Hardware Stocks At A Peak: 2024 Growth May Not Translate To Returns

seekingalpha04-12

The AI investing landscape can be vast and confusing, but there's a structured way to break down the sector's contribution levels.Hardware has had the biggest names rally on the back of AI, many with ...

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Returns\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-12 21:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683129-ai-hardware-stocks-at-a-peak-2024-growth-may-not-translate-to-returns><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The AI investing landscape can be vast and confusing, but there's a structured way to break down the sector's contribution levels.Hardware has had the biggest names rally on the back of AI, many with ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683129-ai-hardware-stocks-at-a-peak-2024-growth-may-not-translate-to-returns\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1923623000.USD","symbol_name":"Natixis Thematics AI & Robotics Fund R/A 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ACC","BK4543":"AI"},"translate_title":"人工智能硬件股票处于顶峰：2024年的增长可能不会转化为回报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AMD.AU":1,"ZS":1,"WDC":1,"TSLA":1,"SMCI":1,"SKIS":1,"PLTR":1,"NVDA":1,"MU":1,"MSFT":1,"META":1,"INTC":1,"HPE":1,"AMD":1,"GOOGL":1,"FUBO":1,"DELL":1,"GOOG":1,"ANET":1,"AMZN":1,"GFS":0.9},"content_text":"The AI investing landscape can be vast and confusing, but there's a structured way to break down the sector's contribution levels.Hardware has had the biggest names rally on the back of AI, many with good reason and significant growth.But after a year and a half of rallying, even with strong growth still to come for AI in 2024, the rallies may be at a peak.I recommend trimming on any further highs and wait for a large corrective pullback in Arista Networks, AMD, and Nvidia.   J Studios/DigitalVision via Getty ImagesThe AI investment world is vast and can be difficult to navigate. Nowadays, it only takes listening to any given earnings call to hear nearly every company mention AI at some level. Does that necessarily make it an AI company or an AI investment? The short answer is... likely no. But there's a way to organize the AI world into tiers and further make sense of the \"real\" AI names from the AI-buzzword types. And the most popular tier contains all the names you've heard of, the ones laying the foundation of the AI world. The problem is, after nearly five quarters of AI-driven rallies, the hardware names already have or will shortly converge on their peaks, even with growth looking quite bullish for the rest of this year. Categorizing Complex AI Concepts To break down AI, you have to look at the various pillars of the industry. At the highest levels are the \"makers\" and the users. Artificial intelligence, as the phrase implies, is non-human and, therefore, requires some type of computational system to process data. No different in concept from the original mainframes, the first PCs, and eventual virtual machines sitting in server racks powering our Internet today, AI systems are made up of silicon and a multitude of chipsets. This is the hardware category of AI, and many names are involved with this tier of AI. This group is responsible for designing and architecting the different corners of the AI hardware market. Yes, this includes the GPU chips many AI accelerators are based upon. But it also consists of the networking required to link the accelerators, the high-bandwidth memory to actively manage the data, and the fast solid-state drives to store the data. These are your Nvidias (NVDA), AMDs (AMD), Intels (INTC), Arista Networks (ANET), Microns (MU), and Western Digitals (WDC) of the world. They define the hardware market - along with many other names - and create the foundational framework to process the massive data streams needed to produce usable outputs for business and consumer benefit. The other end of the AI market is the \"end users,\" and, no, this doesn't necessarily mean you and me. This group is responsible for the data, models, and application software used to produce AI-generated output. This includes things like OpenAI's ChatGPT, but it also includes companies using it internally to generate a better product, a product that may not necessarily be an AI concept but accelerates or refines the product to make it better. The end user list is vast and wide, but it includes names like Microsoft (MSFT), Meta Platforms (META), Alphabet (GOOG)(GOOGL), Amazon (AMZN), Tesla (TSLA), Palantir (PLTR), Zscaler (ZS), and even fuboTV (FUBO). Many companies legitimately work to create an AI product, use AI for their already established products, or both. While these are the two ends of the AI world, there's a third category: The middlemen. These are the ones who take the chips, networking, memory, and drives and make them the units that power on and whir away in the data centers they're built for. These are the Dells (DELL), Hewlett Packard Enterprises (HPE), and Super Micro Computers (SMCI) of the world (among a few others). Without them, motherboards, CPUs, GPUs, networking, and storage devices would be very expensive paperweights. Today, however, I'm only going to focus on the hardware segment since this group has had some of the largest returns over the last year and a half, of course, led by none other than Nvidia. Data by YChartsI want to preface this analysis with a single but important caveat. Most of these names may still have some left in the tank for a further rally over the coming two or three months. And while they may have excellent year-to-date returns come June, once they top, the latter half of the year may see a fairly steep correction in all of them, wiping out much or all of 2024's gains. The point of this article is to inform you that while growth still looks quite excellent for them financially and fundamentally, the share returns may be peaking as we head into late spring. My call to action varies on each ticker, but the common theme is to pocket profits as they head into target areas to reduce risk as the reward minimizes from a technical chart perspective. Arista Networks Had An Excellent Run... Can It Continue? Many of the AI names I've covered, dating back to the summer of 2022, have come before AI was mainstream and on every news website. Arista Networks was one of those I covered for years before then, but in January of 2023, I could see the AI path. Coincidentally, the fundamentals met the targets on the chart, and the stock entered my buy zone under $110. I have no regrets about that call except one: I didn't buy enough of it in my first tranche. Since that pounding-the-table buy, the stock has nearly tripled as it now hovers near the $300 area. I then reiterated my buy with an article in August 2023 that won the Seeking Alpha \"Best AI Idea\" competition. Since then, the stock is up 64%. But now, in 2024, the stock and the fundamentals are set to take a breather. While this is not the end of the stock's long-term bullish future, it's nearing what should be a meaningful correction to consolidate the last year and a half - a good place to mark a hold rating from a passionate buy. First, the fundamentals in terms of revenue growth are set to slow after a very nice 2023. After coming off a year with 34% growth, analysts expect it to slow to very low double digits.   Seeking AlphaAnd that's not just analyst fairy dust. ANET's management has given a clear indication 2024 will be a lull while Ethernet makes its grand entrance into direct AI usage next year with the latest standard.  Despite limited visibility at this time, we reiterate our double-digit growth of 10% to 12% from Analyst Day, aiming for approximately $6.5 billion in 2024. - Jayshree Ullal, CEO, FQ4 '23 Earnings Call  That's not to say Ethernet isn't building out the infrastructure of modern data centers or even AI-only data centers today. Still, the speed at which the next iteration of Ethernet is set to hit means it can relieve bottlenecks on the backend and \"in between\" AI server infrastructure. But this isn't set to hit production until 2025, when ANET's business should meaningfully inflect (requiring analyst estimates to be revised). However, with no guarantees the latest Ethernet standard will be adopted wholesale by data centers as InfiniBand will overlap with some of the new Ethernet use cases, there's nothing to say growth will hit a steep inflection point. Instead, it's likely to take a several-quarter ramp into late 2025, where quarterly growth should return to the mid-20 percentage range. This brings me to how the chart looks for the remainder of the year. The high-level read on the chart is ANET is working its way into the final waves of this third wave. This third wave has been underway since June 2022, and ever since my call in January 2023, the stock has been on a typical run of a nested third wave.   Chart mineThe bottom line is the top of this wave, since it appears to be in an atypical A-B-C wave with the trend, means it could extend to the 100% Fib extension. However, it has struggled to make headway over the 78.6% extension, which could also be a termination point for the wave and subsequently correct to the low-to-mid $200s. If the stock rallies to the $350 area at the 100% extension, a pullback in a fourth wave should see it retrace to the mid-$200s near $250. This means the reward is 18% upside while the downside (from current $297 prices) is 28%. After a near 160% return on my position (judging from my public article), trying to get a final 18% upside isn't worth the risk when there likely will be a better place to add to my position once the pullback is underway. Moreover, this correction could last until the end of the year. If it does, the return for 2024 would be negative 8% if the pullback heads to $215. AMD's Growth Doesn't Align, Even If AI Revenue Is Multiplying Readers know I favor Nvidia's AI growth prospects over AMD's, but that doesn't mean I didn't provide a strategy to profit from AMD's envious share run. In fact, I closed out my AMD call from late November to mid-March for a 56% gain when the stock was around $194. So, I'm not opposed to making money on a name I don't think will benefit nearly as much from AI as its closest competitor. But it's because of the combination of a fairly disappointing outlook on AI revenue for 2024 (yes, even though management raised guidance), the lack of growth in other areas, which is a significant headwind to that AI revenue, and the chart showing some final breaths to this rally - if it hasn't already given out - providing the push to downgrade AMD. Starting with the revenue aspect, AI revenue will increase manyfold throughout this year compared to 2023 with none. So, AI growth will look quite impressive, but the rest of the business will be struggling for the same reason. How? There's cannibalization happening with GPU-centric capex being spent in the industry while CPU-centric server investments suffer. This hits AMD in one pocket and slightly replaces it in the other. How else do you explain a massive ramp in AI revenue but only 13%-14% in company-wide revenue growth for 2024? There's a lot else struggling. What's more startling is AMD's valuation is above and beyond Nvidia's. All the while it's expected AMD will grow EPS 35%-40% this fiscal year while Nvidia is expected to grow it 90%-100%. Data by YChartsFrom a fundamental standpoint, AMD is not only always a bridesmaid and never a bride in terms of GPUs and market penetration but it's also running on a valuation most think Nvidia should be at. And that cuts both ways because Nvidia bears think Nvidia is overvalued. You can't say Nvidia is and AMD isn't; it's just not factually accurate. With the sell-off to the $160s, the stock is only up 15% year-to-date. While AI revenue will continue to grow and likely even see the segment's revenue guidance raised, it isn't in a solid position to reach an inflection point. Data by YChartsAnd with the chart showing a possible end to this rally, I won't risk the potential reward for one more rally that may only peak a bit above this year's high. With the chart falling out of an ascending channel after a brief peak above it, the bullish sentiment driving the stock may have left stage right.   Chart mineHowever, I expect the channel to be tested by rallying back to the lower trendline before a further decline occurs, meaning a bounce to $195-$200 could be in the works. Overall, AMD might have a lot to gain in AI revenue, but weaker other business segments are offsetting it. And with the chart not being nearly as bullish as it was a few months ago, I no longer have a reason to chase this one. What About Nvidia? This is where much of the 2024 hardware story lies. While Nvidia has monstrous growth coming in 2024 and even 2025, the stock chart isn't looking quite as bullish. While AMD has a smaller chance of seeing new highs, Nvidia currently has a good chance of making one more high before a deeper correction occurs. I expect Nvidia's fundamentals to exceed analyst expectations and even the highest estimates throughout the year. Yes, Nvidia's fundamentals still look quite good. But even so, they're slowing, even as supply constraints ease and more products can be produced and shipped.   Seeking AlphaSlowing growth can be a catalyst for smaller share returns. That said, the probability remains high for outperformance, which could spur one last rally in the stock toward and above $1,000 - as high as $1,250, technically speaking, based on Fib extensions. However, I expect the stock to pull back meaningfully after this next rally, potentially lasting the rest of the year. But in the meantime, a run into May's earnings report may be just what the chart doctor ordered. If my target area is reached before mid-May, earnings would be a catalyst for a selloff. Obviously, much has to happen and just right for that to be the case, but it's something to watch for. While the Elliot Wave chart may look very busy, there's a lot of history and culmination happening after many months of rallying. The bottom line is this final fifth wave is forming as an A-B-C rally rather than an expected five-wave rally. This means the {c} wave should target the 78.6% or even the 100% extension, providing the target range of $1,130 and $1,212.   Chart mineBut I'm waiting to see a bottom form in wave {b}, so these targets may slide slightly before the C wave is underway. Thus far, even after CPI, things look good. As long as we don't see a low below Tuesday's low, it should be constructive for upside. Again, I have confidence Nvidia's growth will continue as it rolls out its Blackwell generation of AI accelerators with varying flavors for customers' needs. This doesn't mean I don't think the fundamentals and story are broken with Nvidia. Still, the chart is approaching the end of a once-in-a-many-year type of rally. Even from a pragmatic viewpoint, consolidation would be healthy and necessary if the stock is to push much deeper into record territory years from now. 2024 Might Not Be An \"AI Year\" For Investors?  These three names are just the tip of the iceberg for companies with strong growth and promising stories around AI already proving themselves. But my two-pronged investing approach is giving me warning signs at least a temporary top is imminent in the next few months if it hasn't already done so, as is one of the possible scenarios with AMD. While many investors may be on the AI-forever-go-up train, I'm taking a more risk-adjusted approach to positions as I set up many of them nearly two years ago and I've let the story play out. This is an excellent time to trim, and I'll continue to do so if the final rallies this year play out.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426879197"}