Embracing Volatility: A Positive Outlook on the Tech Sector and AI
In the ever-evolving landscape of technology, the sentiment surrounding the tech sector remains optimistic, particularly regarding the future of artificial intelligence (AI). As we navigate through periods of market volatility, there lies a unique opportunity for investors to build long-term exposure to AI. This article delves into the current state of the tech sector, the robust spending commitments from major AI customers, and the anticipated growth in the semiconductor industry, all while highlighting the strategic approaches investors can adopt.
Strong Spending Commitments from Major AI Players
A significant trend emerging from the tech sector is the commitment of major AI customers to substantial spending through 2025. Industry giants like Alphabet and Meta have underscored the risks associated with underspending on AI, emphasizing that a cautious approach may be more detrimental than an aggressive one. This perspective is supported by our analysis, which indicates that the combined capital expenditure (capex) intensity of big tech—calculated as capex divided by sales—remains below historical peaks. This suggests that there is ample room for growth and investment in AI technologies.
Moreover, the support from a diverse range of customers, including cloud platforms, enterprises, and sovereign entities, reinforces our positive outlook on AI semiconductors. The projected growth in the AI semiconductor industry is staggering, with revenues expected to soar from USD 58 billion in 2023 to USD 168 billion by the end of this year, and further to USD 245 billion by the end of 2025. This trajectory highlights the increasing reliance on AI technologies across various sectors.
Anticipation of Third-Quarter Results
As we approach the third-quarter earnings season, market catalysts are on the horizon. Investor focus is likely to shift towards the fundamentals of tech companies, particularly as earnings reports begin to roll in. While the second-quarter results presented a mixed bag, there is a strong expectation that tech and AI companies will “beat and raise” for the September quarter. A notable early indicator of this trend is the Taiwan Semiconductor Manufacturing Company (TSMC), which recently reported a remarkable 40% year-over-year increase in September revenue. Full quarterly results are anticipated next week, further fueling optimism in the sector.
Our forecasts suggest an impressive earnings growth of approximately 35% for our selected AI stocks in 2024, followed by an additional 25% growth in 2025. This anticipated growth underscores the resilience and potential of the tech sector, particularly in the realm of AI.
The Accelerating Technology Upgrade Cycle
A critical factor driving the momentum in AI is the ongoing technology upgrade cycle. The initial surge in computing demand for generative AI has predominantly been fueled by graphics processing units (GPUs) and custom chips utilizing advanced transistor sizes of 5 and 4 nanometers. However, major chipmakers are poised for a significant leap in computing power over the next five years, with plans to reduce transistor sizes further. Smaller transistors enable the integration of more transistors within a single chip, enhancing processing capabilities and efficiency.
This anticipated advancement is expected to lead to substantial performance improvements, prompting elevated investments in AI chips. Additionally, we foresee select beneficiaries emerging within the semiconductor equipment and data center supply chain segments, further bolstering the overall ecosystem.
Strategic Approaches for Investors
Given the positive outlook for the semiconductor space and megacaps in AI, investors are encouraged to consider structured strategies or adopt a buy-the-dip approach for high-quality AI stocks. This strategy allows investors to capitalize on market fluctuations while positioning themselves for long-term gains. For those willing to navigate the risks associated with illiquidity, there are expansive opportunities in private markets, particularly focusing on large language models, software applications, and data centers.
Main Contributors
This analysis has been shaped by insights from industry experts, including Solita Marcelli, Mark Haefele, Sundeep Gantori, Daisy Tseng, Jon Gordon, and Christopher Swann. Their collective expertise underscores the importance of a strategic approach to investing in the tech sector and AI.
For further insights and detailed analysis, refer to the original report titled Tech volatility provides opportunity for long-term AI exposure, 9 October 2024.