Investor sentiment received a boost after Nvidia’s quarterly results came out stronger than the most bullish expectations. For the quarter ending in January, the chipmaker’s revenue of $22.1 billion beat consensus estimates, with earnings exceeding expectations by over 10 percent. More importantly, the company gave strong revenue guidance of USD 24bn for the quarter ending in April, on solid artificial intelligence (AI) demand. Post the December quarter results, Nvidia surged 16 percent- making it the third-biggest S&P 500 company. It also hit $2 trillion in market valuation for the first time on February 23.
The $2 trillion milestone followed the chip maker’s blockbuster quarterly report and robust revenue forecast that drove up its market value by $277 billion on Thursday — the largest single-day gain in history, eclipsing the $197-billion gain made by Facebook-parent Meta.
In a recent note, brokerage house UBS noted that the results come as a relief for AI bulls, as expectations have improved significantly after the strong year-to-date rally in AI-related stocks. But despite a 24 percent advance in the tech-heavy Nasdaq since late October last year, UBS continues to see a potential for further gains in technology stocks, especially those that would benefit from the AI revolution.
Increasing AI infrastructure spending points to strong demand, it said.
“Nvidia’s strong results and guidance point to overall solid AI infrastructure spending trends, which were also evident in recent earnings reports from leading tech companies including Microsoft and Alphabet. We have forecast a 15-fold growth in overall AI industry revenue between 2022 and 2027 to $420 billion. But our estimates could prove to be conservative in light of recent developments like Open AI’s text-to-video model Sora and management commentary from Nvidia. Chief executive officer Jensen Huang said that inferencing—the process of running live data through a trained AI model to make a prediction or solve a task—now accounts for some 40 percent of its data center division revenues. This, to us, highlights a broadening in AI demand trends, in addition to deep learning training,” explained the brokerage.
It also pointed out that AI monetization is improving. There is now a wide availability of AI applications in copilots, cloud, models, and other software, and the product pipeline remains strong. In addition, the acceleration in cloud revenue growth reported by Microsoft and Alphabet due to rising contributions from AI also points to a pickup in AI monetization, added UBS.
It expects the applications and models segment to emerge as the dominant force in the medium to long term and forecasts a 152 percent compound annual growth rate in revenue during 2022–27.
Earnings growth for the tech sector is robust, justifying its valuation premium. Given the strong AI-related tailwinds, UBS sees 18 percent year-over-year earnings growth in 2024 for the global tech sector, including information technology and the internet.
While the sector’s forward price-to-earnings ratio is still close to a 22 percent premium versus its 10-year historical average, it has fallen from a peak of around 34 times in April 2021 to around 27 times today. UBS believes this is reasonable considering the sector now has a more recurring revenue profile. Separately, the US tech sector’s return on invested capital over the last 12 months stands at 20 percent, the highest among all 11 US equity sectors.
So, it believes the near-term momentum in AI-related stocks is likely to continue. To position, UBS maintains its preference for semiconductors and software and sees opportunities in beneficiaries of AI edge computing, big tech, and their partners.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 26 Feb 2024, 11:56 AM IST