Over the past month we’ve seen very mixed messages when it’s come to the valuations of and the demand for technology stocks and there is a growing sense, at least among some investors, that perhaps the excitement over those companies heavily exposed to artificial intelligence may have been overblown.
To date Nvidia, one, if not the biggest beneficiary of the AI boom, has fallen almost a fifth since its peak over a month ago while Arm’s shares have also fallen.
For a few investors there are concerns that too many companies are failing to generate positive returns from the significant investments being made in artificial intelligence technology and it’s no longer enough for companies to say that they have, or will have, AI.
If companies fail to see a significant return on AI investments and the focus starts to shift to the financial aspects of that investment, then there are worries that companies like Nvidia and Microsoft may start to suffer.
According to one analyst while this hasn’t happened yet, the markets do tend to be forward- looking so recent price turbulence could signal what investors might think could happen.
While Nvidia may be witnessing a correction the likes of Samsung and ASML are still seeing strong growth driven by AI and in the case of ASML, by suggestions that it could be exempt from the Biden administration’s plans to halt exports of chipmaker equipment from some foreign countries to China.
Despite the sell-off around Nvidia and Microsoft the S&P 500 tech sector is still trading at 29.5 times 12-month earnings estimates, which is almost a two-decade high.
Up until recently investors were happy to invest, and pay, for highly valued stock but that seems to be changing.
Poor results from the likes of Tesla and Alphabet haven’t helped but overall share valuations remain remarkably high. However, should the markets enter a period of instability driven by concerns over interest rate cuts or by the political turbulence of the US presidential elections, not to mention the fractious relationship between the US and China getting worse, then we may see a significant sell-off of more expensive stocks.
The pressure on tech companies to perform and deliver strong results is high and investors are looking for ‘stellar results’ but if concerns do start to mount about the level of returns being seen on the investments being made in AI, then doubts about future profitability will hit valuations and could trigger a big sell off.
Financial results lacking the ‘wow’ factor could also impact valuations, but we are still way off the inflated valuations that existed before the great dot-com crash of the early 2000s – so no need to panic, yet!
