To The Moon

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No matter what the macro data or the Fed's stance is, AI concept stocks continue to surge like crazy. While $NVIDIA Corp(NVDA)$ solidifies its position as the king of AI, it has also emerged as new God of Wall Street. Stocks that the company invests in are eagerly pursued by the market once they are announced.

The most outrageous performer, $SUPER MICRO COMPUTER INC(SMCI)$ , took the lead in reversing its fortunes. After breaking the $1,000 round mark on Thursday and collapsing on Friday, showing a full 1,000 minus 200.

On February 16th, OpenAI unveiled its new AI big model, Sora, which can create realistic 60-second videos with quick text prompts. It's been hailed as "mind-blowing" and "revolutionary," just like ChatGPT.

The sky-high valuations of these AI stocks will eventually return to normalcy. There are two ways for this to happen: either the stock prices crash or the earnings explode. The question is, which path will this AI-fueled rally take?

SMCI is the first to change its tune

In its latest 13F filing with the SEC, Nvidia revealed its investments in companies like $ARM Holdings Ltd(ARM)$ $SoundHound AI Inc(SOUN)$ $Recursion Pharmaceuticals, Inc.(RXRX)$, all AI concept stocks, triggered market funds to follow suit.

The short-term surge in Super Micro Computer's stock has been crazy, far outpacing even the king of AI, Nvidia. It reminds us of the dot-com bubble days when $NASDAQ(.IXIC)$ was booming. Some are even worried that we might see a repeat of the crash.

But is this AI rally really a bubble? Will it burst? And when? These are the questions everyone is asking.

Overall, the commercialization of AI has proven to be viable. The uncertainty lies in the market size and when it will start showing up in major companies' earnings reports. The industry is still in its early stages, and no one knows how big it can grow.

Comparing this AI rally to the early days of the internet bubble, there are significant differences.

Back then, almost all internet companies were just businesses in name, surviving on funding. It was only after the capital bubble burst that they found sustainable revenue models like advertising, gaming, and e-commerce. These models have since penetrated most traditional industries and people's daily lives, fueling a bull market supported by earnings and giving birth to some ridiculously successful companies.

Perhaps learning from history, this AI Rally has been building up for years. AI has been seen as the next technological revolution after the internet, but due to the lack of viable business models, the secondary market didn't react much until ChatGPT came along and provided a real-world application.

During this process, many small and medium-sized venture capital firms have folded, leading to the current situation where only a few winners are left standing. Of course, with their high valuations, these stocks can't afford any earnings misses.

According to projections from major US investment banks, Super Micro Computer is expected to have sales of $14 billion, and net income of about $1 billion this fiscal year (June 2023 to June 2024). If these projections come true, its current market cap of less than $50 billion would give it a PE ratio of nearly 50 times, which isn't outrageous for a high-growth company.

Then there's the king of AI, Nvidia. Although its recent earnings reports have been excellent, the stock price hasn't really moved much after the announcements because the market has already priced in the good news.

Now, everyone's eyes are on Nvidia's earnings report on February 21st. The company is guiding for revenue of $20 billion with a gross margin of 74.5%. Analysts forecast revenue of $20.37 billion, up 236.64% year-on-year, and analysts' forecast for the next quarter is $21.59 billion.

If the earnings don't meet expectations, it could be devastating for Nvidia's stock price in the short term.

As for when Nvidia will reach the same stage as $Tesla Motors(TSLA)$ today, it is necessary to pay attention to the company's sales side. When the company starts talking about competition, price cuts, and costs, that's when we'll know it's entered a new phase.

"The New Tech Business Cycle"

Once again, OpenAI's Sora caused a stir in the industry and capital markets upon its release, much like ChatGPT did before it.

The "text-to-video model" doesn't require users to have any programming or video production skills. All you need to do is input a copywriting instruction, and it can generate a 60-second high-definition video with professional lighting and camera transitions. It has added a lot of market imagination to the commercial applications of generative AI.

But imagination alone isn't enough. The market needs actual profit growth. So far, this significant growth has only been seen in Nvidia. When will it expand to the application side and bring true maturity to the industry?

Franklin Technology Fund specializes in investing in technology stocks, heavily holding six of the seven major technology stocks. Among them, Nvidia and $Microsoft(MSFT)$ are the top two holdings of the fund, making them a tidy profit with a return rate exceeding 54% in 2023.

The fund's chief portfolio manager, Jonathan Curtis, has more than 30 years of experience in the technology industry. He started as a software developer and tester and has been managing Franklin Technology Fund since 2008, selecting high-quality technology stocks for investment.

According to Jonathan, "We are at the beginning of a new tech business cycle. He believes that "the opportunities for AI are so huge that it will touch every creative job. The new tech cycle will start slowly and then accelerate."

If Jonathan's judgment can be validated, it will ultimately depend on when companies like Microsoft, $Adobe(ADBE)$ and $Salesforce.com(CRM)$ will report AI-related revenue.

Most investors in the market don't have much patience. If this process takes too long, there will be significant adjustments in stock prices.

Jonathan predicts that AI is already in the stage of construction and experimentation. Microsoft's integration of AI technology into Office software is a landmark event. Whether this move will be reflected in the financial reports, there will be answered in the second half of 2024.

Capital is waiting for the profits generated by AI applications. Only real profit growth can guarantee that the current high valuation of stock prices won't decline.