Telemus Blog

Artificial Intelligence Remains Front and Center

Written by Matt Dmytryszyn | Feb 26, 2024 2:34:03 PM

Telemus Weekly Market Review February 19th, 2024 - February 23rd, 2024

The dominant story driving the stock market this week was Wednesday evening’s earnings report from semiconductor company, NVIDIA. Heading into Wednesday, shares of the stock were up nearly 40% thus far in 2024. The company’s results were not only better than had been expected, but the company’s financial guidance for the coming quarter supported a further rally in the stock. This led to shares rising another 16% in Thursday’s trading session. 

Adding more color to the NVIDIA’s story, it isn’t just the strength of the past quarter that captivated investors, it was NVIDIA’s CEO Jensen Huang’s comment that AI demand is now at a tipping point. Moreover, Nvidia noted that demand is expected to outpace supply throughout 2024. This provided comfort to investors that the insatiable demand for NVIDIA’s Graphics Processing Units (GPUs) is likely to remain throughout 2024 and added optimism that the growth trajectory can continue into 2025. 

Going into Wednesday’s earnings, the debate was whether one should follow the old trading adage of ‘buy the rumor, sell the news’, or whether results would be strong enough to fuel further advancement in the share price. Thursday’s strong rally answered that question. Behind the scenes there were some additional influences helping to support the strength in the share price. An elevated number of call options had been purchased on the stock going into the earnings release. As NVIDIA’s share price went higher on Thursday, it required the counterparties (traders) on the other side of the call option to buy shares of NVIDIA to hedge their risk. This created a feedback loop where indiscriminate buyers were purchasing shares to hedge risk, with their added demand only sending the share price even higher.  

It is becoming increasingly clear that artificial intelligence is a major technological trend that will influence economic growth and productivity over time. Historically, major technological breakthroughs begin with a wave of elevated investment where capital is deployed to build out the infrastructure to support technological adoption. This is exactly what’s occurring today as capital is being deployed into computing infrastructure (hardware) to support AI adoption. A key source of the funding today comes from cloud service providers such as Amazon, Microsoft and Google. 

As the infrastructure is scaled, we’d expect software applications that embed AI capabilities or support the training of generative artificial intelligence models to begin to experience increased demand. The cadence of adoption is always hard to predict, and past episodes of technological innovation have come with episodes of digestion as use cases for the technology evolve. 

In a recent conversation we had with a data center developer, they indicated that many of the data centers under construction today are being developed to focus explicitly on artificial intelligence applications. Therefore, the insatiable demand for GPUs is stemming from new data center capacity that has yet to be utilized. This leads to a key debate surrounding AI infrastructure spending and whether the current level of demand is persistent or whether the industry is experiencing a more traditional semiconductor cycle where once capacity is reached, we could see a slowdown in demand. 

This ultimate cadence and path of spending on infrastructure is just one of many areas of ambiguity and uncertainty that persists around the artificial intelligence trend. As it stands today, NVIDIA clearly has the early mover advantage and dominant position in the chipsets required to train generative artificial intelligence models. Others such as Advanced Micro Devices are trying to catch up. Moreover, cloud service providers such as Microsoft, Amazon and Google are thought to be exploring the development of their own semiconductors. 

While the big picture around AI is becoming a bit clearer, and capital is quickly being deployed to build out the infrastructure, there remains a great deal of uncertainty on how this technological breakthrough will play out. The early beneficiaries, such as NVIDIA, have become clearer. The next leg of beneficiaries could extend to cloud service providers, software applications, or users that disproportionately benefit from the productivity enhancements that AI can provide. In this exciting time of technological innovation, we are not only focused on the current stage of growth but who may benefit in future phases.  



 

 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Kovitz Investment Group Partners, LLC (“Kovitz”) DBA Telemus Capital. Telemus Capital is a division of Kovitz, a registered investment adviser with the Securities and Exchange Commission (SEC). Telemus Capital’s main office is located in Southfield, Michigan. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.  Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance, and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.  The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities.

Advisory services are only offered to clients or prospective clients where Telemus  Capital and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus Capital  unless a client service agreement is in place.