One of the biggest catalysts driving the market higher over the past year has been the advent of artificial intelligence (AI). Business and market watchers alike agree that increased productivity has the potential to increase profitability, benefiting businesses and shareholders alike. Investors are also on the edge of their seats waiting for insight from the Federal Reserve Bank on the future path of interest rates, and when the central bank might reverse course and start cutting interest rates.
As his background, AI software maker C3.ai (NYSE: AI ) The chipmaker fell 5.2 percent Intel (NASDAQ: INTC ) 5.2%, semiconductor specialist Advanced Micro Devices (NASDAQ: AMD ) 4.2%, memory and storage solutions specialist Micron Technology (NASDAQ: MU ) Dropped 3.9%, and Foundry Taiwan Semiconductor Manufacturing (NYSE: TSM ) It fell 3.2 percent by the market close on Friday.
A check of all the usual suspects — regulatory filings, financial reports, and changes in analysts’ price targets — revealed a few bits of company-specific news to explain the falling stock prices (on More so), which suggests many investors are paying close attention to the economy and geopolitical conflicts.
Dim prospects for near-term rate cuts
Investors are looking for a round of interest rate cuts to begin, which will finally end the ongoing battle to contain inflation. Yet recent reports suggest that higher prices are not yet behind us.
The latest monthly report on inflation, courtesy of the U.S. Bureau of Labor Statistics, showed that inflation was surprisingly stubborn, sending a wave of anxiety to Wall Street. The Consumer Price Index (CPI), the most widely watched gauge of inflation, rose 3.5 percent in March from a year earlier, but rose just 0.4 percent month-on-month.
The increase was more than expected. Economists had expected 3.4% year-on-year and 0.3% sequentially. Ahead of the report’s release, investors were hoping for the first interest rate cut this year in June, but the specter of persistent inflation dampened those hopes.
The ongoing war between Israel and Hamas is also weighing on market sentiment, as investors fear the conflict could spill over into the region.
Why inflation matters
So, what does this have to do with our AI stocks? The biggest issue is the high cost of borrowing money, as businesses are thus unlikely to scale operations and adopt next-generation technologies, including generative AI.
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C3.ai builds plug-and-play AI software models for businesses. Companies are unlikely to incur additional costs while inflation remains high.
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Intel makes semiconductors that help power data centers and AI systems, which will likely experience slower adoption.
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AMD’s graphics processing units (GPUs) are a key component that facilitates the training and deployment of AI systems. These processors are expensive — tens of thousands of dollars or more — so adoption by businesses is likely to be delayed while borrowing costs are high.
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Micron Technology provides flash memory and storage systems that accelerate AI processing, so it will also be affected by higher interest rates.
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Taiwan Semiconductor Manufacturing, commonly known as TSM, is the foundry that brings many of these AI chips to life, so the slow adoption of AI means declining semiconductor sales.
These issues aside, there was some mixed news regarding the company that further muddied the waters.
Bank of America Analyst Vivek Arya cut his price target on Intel to $44, maintaining a neutral (hold) rating on the stock. This represents a potential upside of 17% from Thursday’s closing price. Analysts cited disappointing results from Intel’s Foundry segment for the growing pessimism.
There was also a report by Cleveland Research that suggested Intel. May be Losing share in the personal computer and server markets. There were also reports that China has instructed telecom companies to phase out the use of foreign processors, which – if true – could directly affect Intel and AMD.
The earthquake in Taiwan earlier this month could weigh on Micron’s results in the current quarter, as the company has yet to return to full production of its dynamic random access memory (DRAM) processors. however, City Analyst Christopher Danley believes this could be positive for Micron, as lower supply leads to higher prices, noting that any drop in revenue would be temporary.
Across the board pricing
In terms of valuation, this group of stocks is a mixed bag. AMD, C3.ai, TSM, Micron, and Intel are currently trading at 8x, 7x, 7x, 4x, and 2x forward sales, respectively, making Intel the most attractive. When measured using forward price/earnings-to-growth (PEG) ratios — which factor in a company’s current growth rate — TSM, AMD, and Intel have multiples of less than 1, which That is the quality of an undervalued stock.
I’m not a fan of Intel, as the company has been mired in years of turnaround and has yet to prove that its efforts will pay off. Among the stocks presented, I believe TMS and Micron offer the most upside, as the pick-and-shovel plays in the AI revolution.
There is still a long runway for generative AI, and the opportunity is vast. However, investors should be prepared for a lot of volatility ahead, even as overall momentum is likely to remain up and to the right.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is the advertising partner of The Motley Fool Company. Danny Veena has no position in any stocks. The Motley Fool owns and recommends positions in Advanced Micro Devices, Bank of America, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends C3.ai and Intel and recommends the following options: long January 2023 calls on $57.50 Intel, long January 2025 calls on $45 Intel, and short May 2024 calls on $47 Intel. The Motley Fool has a Disclosure Policy.
Why C3.ai, Intel, Advanced Micro Devices, and Other Artificial Intelligence (AI) Stocks Fell on Friday was originally published by The Motley Fool.