One of the biggest catalysts driving the market higher last year was the emergence of artificial intelligence (AI). Companies and market observers alike agree that the potential for productivity gains could boost profits, benefiting companies and shareholders alike. Investors are also eagerly awaiting insights from the Federal Reserve Bank on the future direction of interest rates and when the central bank might change course and begin cutting interest rates.
Against this background, the AI software manufacturer C3.ai (NYSE:AI) fell 5.2%, chip maker Intel (NASDAQ:INTC) fell 5.2%, semiconductor specialist modern micro devices (NASDAQ:AMD) slumped 4.2%, storage and storage solutions specialist Micron technology (NASDAQ:MU) fell by 3.9% and foundry Taiwan semiconductor manufacturing (NYSE:TSM) By the close of trading on Friday, the price had fallen 3.2%.
A review of all the usual suspects—regulatory filings, financial reports, and changes in analyst price targets—turned up a few company-specific news stories that should explain falling stock prices (more on that in a moment), suggesting many investors are heavily focused on the economy and geopolitical conflicts.
The bleak prospects of a short-term interest rate cut
Investors were eager for the start of a round of interest rate cuts that would finally end the ongoing battle to contain inflation. However, recent reports suggest that higher prices are not yet behind us.
The latest monthly inflation report, courtesy of the US Bureau of Labor Statistics, showed that inflation was surprisingly stubborn, causing excitement on Wall Street. The consumer price index (CPI), the most widely watched indicator of inflation, rose 3.5% in March compared to the same period last year, while it rose just 0.4% month-on-month.
The increase was higher than hoped; Economists had expected 3.4% year-on-year and 0.3% sequentially. Before the report’s release, investors were hoping that the first of several rate cuts this year would come in June, but the specter of continued inflation dimmed those hopes.
The ongoing war between Israel and Hamas is also weighing on market sentiment, as investors fear the conflict in the region could spread.
Why inflation matters
So what does this have to do with our quintet of AI stocks? The biggest problem is the increased cost of borrowing, as companies are unlikely to expand their operations and adopt next-generation technologies, including generative AI.
-
C3.ai creates plug-and-play AI software models for enterprises. Companies are unlikely to absorb additional costs as long as inflation remains high.
-
Intel makes semiconductors that power data centers and AI systems, which will also likely be slower to adopt.
-
AMD’s graphics processing units (GPUs) are a key component that makes training and deploying AI systems easier. These processors are expensive — running into tens of thousands of dollars or more — so companies are likely to delay adoption while borrowing costs are high.
-
Micron Technology offers flash memory and storage systems that accelerate AI processing and will therefore 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.
Aside from these issues, there was some mixed company-specific news that further muddied the waters.
Bank of America Analyst Vivek Arya lowered his price target on Intel to $44 but maintained his neutral (hold) rating on the stock. This represents a potential gain of 17% compared to Thursday’s closing price. The analyst cited disappointing results from Intel’s foundry segment as the reason for the increased pessimism.
There was also a report from Cleveland Research that suggested Intel May Losing market share in the personal computer and server market. There have also been reports that China has ordered telecom companies to begin phasing out the use of foreign processors, which, if true, could have a direct impact on Intel and AMD.
An earthquake in Taiwan earlier this month could 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, City Analyst Christopher Danely believes this could be positive for Micron as lower supply leads to higher prices, noting that any drop in sales would be temporary.
Blanket assessments
In terms of valuation, this group of stocks is a mixed picture. AMD, C3.ai, TSM, Micron and Intel are currently selling for 8x, 7x, 7x, 4x and 2x forward sales respectively, making Intel the most attractive. Measured by a forward price-earnings-growth (PEG) ratio, which takes into account 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 in transition for years and hasn’t yet proven that its efforts will succeed. Of the stocks featured, I think TMS and Micron offer the most upside as pick-and-shovel plays a role in the AI revolution.
The road to generative AI is still long and the opportunities continue to be huge. However, investors should expect a lot of volatility, although the overall trend will likely continue to be up and to the right.
Should you invest $1,000 in C3.ai now?
Before you buy shares on C3.ai, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and C3.ai wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Stock Advisor provides investors with an easy-to-understand roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor The service has more than tripled the returns of the S&P 500 since 2002*.
Check out the 10 stocks
*Stock Advisor returns from April 8, 2024
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends C3.ai and Intel and recommends the following options: long $57.50 January 2023 calls on Intel, long $45 January 2025 calls on Intel, and short May calls 2024 worth $47 on Intel. The Motley Fool has a disclosure policy.
Why C3.ai, Intel, Advanced Micro Devices and Other Artificial Intelligence (AI) Stocks Plunged Friday was originally published by The Motley Fool