One of the biggest catalysts propelling the market higher over the past year or so has been the advent of artificial intelligence (AI). Businesses and market watchers alike agree that the potential for productivity increases could boost profits, benefiting enterprises and shareholders alike. Investors are also waiting on the edge of their seats for insight from the Federal Reserve Bank regarding the future trajectory of interest rates, and when the central bank might reverse course and begin cutting interest rates.
With that as a backdrop, AI software maker C3.ai (AI +2.07%) fell 5.2%, chipmaker Intel (INTC +4.36%) tumbled 5.2%, semiconductor specialist Advanced Micro Devices (AMD +18.37%) slumped 4.2%, memory and storage solutions specialist Micron Technology (MU +4.04%) dropped 3.9%, and foundry Taiwan Semiconductor Manufacturing (TSM +6.36%) tumbled 3.2% by the time the market closed on Friday.
A check of all the usual suspects -- regulatory filings, financial reports, and changes to analysts' price targets -- revealed a few bits of company-specific news to explain the falling stock prices (more on that in a bit), which suggests many investors are keenly focused on the economy and geopolitical conflicts.
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The dimming prospects of a near-term rate cut
Investors have been keen for a round of interest rate cuts to begin, which would finally put to bed the ongoing battle to tame inflation. Yet recent reports suggest higher prices aren't yet behind us.
The latest monthly report on inflation, courtesy of the U.S. Bureau of Labor Statistics, showed that inflation was surprisingly stubborn, which sent a ripple of anxiety across Wall Street. The Consumer Price Index (CPI), the most widely watched gauge of inflation, increased 3.5% in March compared to the year-ago period while edging just 0.4% higher month over month.
The increase was higher than hoped; economists had expected 3.4% year over year and 0.3% sequentially. Prior to the report's release, investors were hoping the first of several interest rate cuts this year would happen in June, but the specter of persistent inflation dimmed those hopes.
The ongoing war between Israel and Hamas is also weighing on market sentiment, as investors fear the conflict could expand in the region.
NASDAQ: MU
Key Data Points
Why inflation matters
So, what does this have to do with our quintet of AI stocks? The biggest issue is the elevated cost of borrowing money, as businesses are thus unlikely to expand operations and adopt next-generation technologies, including generative AI.
- C3.ai creates plug-and-play AI software models for businesses. Companies are unlikely to take on additional expenses while inflation remains elevated.
- Intel manufactures semiconductors that help power data centers and AI systems, which will also likely experience slower adoption.
- AMD's graphics processing units (GPUs) are a key component that facilitates the training and deployment of AI systems. These processors are costly -- at tens of thousands of dollars or more -- so businesses are likely to delay adoption while borrowing costs are high.
- Micron Technology provides flash memory and storage systems that accelerate AI processing, so it will also be affected by higher interest rates.
- Taiwan Semiconductor Manufacturing, commonly called TSM, is the foundry that brings many of these AI chips to life, so slower adoption of AI means fewer semiconductor sales.
Those issues aside, there was some mixed company-specific news that further muddied the water.
NYSE: TSM
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Bank of America analyst Vivek Arya lowered his price target on Intel to $44 while maintaining a neutral (hold) rating on the shares. This represents potential upside of 17% compared to Thursday's closing price. The analyst cited disappointing results from Intel's foundry segment for the increased 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 begin phasing out the use of foreign processors, which -- if true -- could directly impact Intel and AMD.
An earthquake in Taiwan earlier this month may weigh on Micron's results in the current quarter, as the company has not yet returned to full production of its dynamic random access memory (DRAM) processors. However, Citi analyst Christopher Danely thinks this could be a positive for Micron, as less supply leads to higher prices, noting that any decrease in revenue would be temporary.
Across-the-board valuations
In terms of valuation, this group of stocks is a mixed bag. AMD, C3.ai, TSM, Micron, and Intel currently sell for 8 times, 7 times, 7 times, 4 times, and 2 times forward sales, respectively, making Intel the most attractive. When measured using a forward price/earnings-to-growth (PEG) ratio -- which factors in a company's current growth trajectory -- TSM, AMD, and Intel have multiples of less than 1, the standard for an undervalued stock.
I'm not a fan of Intel, as the company has been mired in a years-long turnaround and has yet to prove its efforts will succeed. Among the stocks presented, I believe TSM and Micron offer the most upside, as pick-and-shovel plays in the AI revolution.
There is still a long runway ahead for generative AI, and the opportunity remains vast. However, investors should be prepared for much volatility ahead, even as the overall trajectory will likely remain up and to the right.
