Artificial Intelligence - A Watershed Moment?
Investing can sometimes feel like fashion. Trends come in and out of favor. Some prove to be real and durable, like the internet, mobile computing, and cloud software. Others end up being fads and flame out, never to live up to such heightened expectations or take much longer to materialize. Determining which is obvious after the fact but can be challenging in the moment.
Investors have been debating where artificial intelligence (AI) stood. Sure, we were aware of its great promise, but how much time would it take to become meaningful? How big could it become? Who would be impacted positively? Negatively? Up until recently, it was a nice feature. Google’s search bar could anticipate what we were typing to save us a few keystrokes. We could organize and search our personal photos by the people included in the image. It made existing products work a little better.
Recently, things have started to get more interesting. First was the November 2022 release of ChatGPT that went viral. It amassed 100 million monthly active users in only two months, which made it the fastest-growing consumer application in history, according to UBS. Another milestone was Microsoft’s announcement that it was investing billions into ChatGPT’s owner, OpenAI. Microsoft said that it was integrating its functionality into its search engine to better compete with Google. This unnerved Alphabet investors, wiping billions off its market value. While meaningful, such action seemed largely confined to the search market.
We believe a lot changed on May 24th. That was the day that NVIDIA released its quarterly earnings report, which gave us a taste of how quickly Artificial Intelligence spending is ramping. NVIDIA is the leading provider of computer chips that are used for AI applications – like how Intel powered most PCs. The reported quarter was fine, but the fireworks came with management’s forecast for the upcoming period. Due to surging demand for its chips, NVIDIA estimated that its quarterly sales would come in around $11 billion – over 50% higher than analyst estimates of roughly $7 billion, according to FactSet. It was an unprecedented surprise, especially for a chip company of size. Moreover, NVIDIA said that it expected demand to grow further from those levels for the remainder of the year, proving to Wall Street that it expects this trend to be sustained. NVIDIA’s stock surged along with most tech stocks, and the company recently eclipsed a $1 trillion market valuation.
What does it mean? AI is real and coming fast. Judging by NVIDIA’s sales forecast, it’s a priority investment for a broad number of customers. This is impressive considering that most tech firms have spent the better part of a year slashing costs and cutting headcount to counter slowing growth. This has helped tech’s YTD performance, but eventually investors need to see sustained demand. Perhaps AI is the catalyst to keep technology stocks from falling back into their 2022 funk. It’s a trend that we’re watching closely at Harrison Financial Services and will be looking to supplement our existing exposure on an opportunistic basis.
The opinions expressed are those of Harrison Financial Services as of June 7, 2023 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Past performance is not a guarantee of future results.