Monday, December 23, 2024

Why the stock market’s AI trade came back to life this week

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Matt Stroshane/Getty, Tyler Le/BI

  • AI stocks like Nvidia, Super Micro Computer, and Broadcom soared nearly 20% this week.

  • The rally was sparked as Oracle and Nvidia executives addressed concerns about AI returns.

  • Oracle shares surged by 24% after Larry Ellison’s bullish comments on AI’s long-term potential.

The stock market’s artificial-intelligence trade was revived this week, with shares of AI stalwarts like Nvidia, Super Micro Computer, and Broadcom soaring by nearly 20%.

AI-related names and semiconductor shares were caught in a slump after Nvidia reported its second-quarter earnings two weeks ago. Nvidia shares slid sharply after the company failed to meet sky-high expectations, leading investors to question how much further the AI trade could possibly run after a yearslong hot streak.

Questions about the return on the billions of dollars’ worth of investment in AI by big firms led to a sell-off in the space.

But the market staged a comeback this week as key players separately addressed some burning questions from investors about what to expect from big AI spend.

At midday on Friday, shares of Nvidia and Oracle were 16% higher for the week, while Super Micro Computer stock was up by 19% and Broadcom had risen by 21%.

Helping drive the week’s resurgence were the billionaire investor Larry Ellison, Oracle’s cofounder and chairman, and Jensen Huang, Nvidia’s cofounder and CEO.

Both executives addressed concerns about the return on investment for AI infrastructure spend, and investors seem to be taking their word for it.

Oracle’s Ellison: ‘This race goes on forever’

Oracle reported solid earnings after the market close on Monday. On the earnings call, Ellison talked up AI’s immense potential.

Discussing the sustainability of AI-infrastructure spending, which has exploded in recent years, Ellison argued that it’s not going to stop.

“This race goes on forever, to build a better and better neural network,” Ellison said. “And the cost of that training gets to be astronomical.”

He added: “I think this is an ongoing battle for technical supremacy that will be fought by a handful of companies and maybe one nation-state over the next five years at least, but probably more like 10. So this business is just growing larger and larger and larger. There’s no slowdown or shift coming.”

After those bullish comments, Oracle shares soared by as much as 24% at their intraday peak on Friday.

At its analyst day this week, Oracle gave investors long-term annual revenue guidance of $104 billion by 2029, with earnings per share set to grow by more than 20% between now and then.

“This matched the bullishness the Company has been coyly hinting at for a number of months now; this was the upside to expectations that justifies continued multiple expansion, in our view,” the KeyBanc analyst Jackson Ader said in a note.

Ellison said that building an AI training model for cloud companies would cost upward of $100 billion.

“That’s over the next four, five years for anyone who wants to play in that game,” he said. “That’s a lot of money, and it doesn’t get easier.”

That should be great news for Nvidia, which is the main supplier of AI-enabling GPUs that cloud companies use to build their models.

Nvidia’s Huang: ‘You get a 10x savings’

At a Goldman Sachs conference on Wednesday, Huang was directly asked about concerns related to customers’ return on investment in AI spending, and Huang gave a direct answer.

“The return on that is fantastic because the demand is so great that for every dollar they spend with us translates to $5 worth of rentals,” Huang said of the cloud hyperscalers buying his company’s chips. “And that’s happening all over the world, and everything is all sold out.”

On top of that, Huang said companies were seeing immense cost savings with Nvidia’s GPUs thanks to computation inflation found with CPUs.

By running Nvidia’s GPU accelerators relative to traditional CPUs, Huang said, “you reduce the computing time by about 20 times, and so you get a 10x savings.”

Shares of Nvidia have surged by 12% since Huang took the stage at Goldman’s conference on Wednesday morning.

The AI rally spread throughout the tech sector this week, with semiconductor stocks seeing renewed interest and a nearly 10% surge.

Read the original article on Business Insider

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