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There has been much consternation on Wall Street as to whether artificial intelligence is causing a bubble on Wall Street: some say no; others say yes.
While investors debate the merits of whether AI is a bubble or not, valuations of some tech stocks may have more room to run, Citi believes.
“We would note that these bubbles can last a year or longer, similar to what happened in 1999 with the tech bubble,” Citi analyst Christopher Danely wrote in an investor note, adding the bubble could last into 2025 as long as estimates keep rising.
The area of the market that is most impacted by the rise of AI is semiconductors, with stalwarts like Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) seeing massive jumps in valuations in recent memory. Nvidia shares have soared nearly 2,000% over the past five years and 266% gain over the past 12 months. AMD is up more than 700% and 109% over the same time frame.
While these types of moves may give some investors heartburn, the trend is likely to continue higher, Danely said.
Is this 1999 all over again?
Like with the stock market bubble of the late to mid-90s, valuations of tech companies have soared. However, unlike the last decade of the 20th century, the hype is built on something real, Danely said.
“This is one of the rare times its different,” Danely explained, noting AI is expanding the total addressable market of chips. He believes the total addressable market of AI semiconductors has gone to $90B this year, up from $40B last year.
Some have forecast that number to be sharply higher in a few years, as Bank of America said recently the global AI accelerator market could reach anywhere between $250B and $500B over the next three to five years, up from a previous view of less than $250B.
“Given this growth opportunity and last year’s semi unit decline of 19%, we believe semis should trade at a premium,” Danely said.
Danely believes that 2024 is more similar to 1999 in that valuations are likely to keep expanding. Valuations of high flying tech companies did not “come apart until late 2000,” he said, suggesting stocks have a little more room to run.
Micron (MU) is Danely’s top pick in the chip space, due in part to the upswing in memory use for AI. He also has Buy ratings on AMD, Broadcom (AVGO), Analog Devices (ADI), Microchip (MCHP) and ON Semiconductor (ON).
Others, however, believe the AI revolution is just getting started and that this is not a 1999-type environment.
“Lets be clear: we have covered tech on the Street since the late 90’s and this is not a bubble but instead the start of a 4th Industrial Revolution now on the doorstep that will have major growth ramifications for the tech sector led by the software/use case phase in motion,” Wedbush Securities analyst Dan Ives wrote in a research note earlier this week, referencing the recent sell-off in Nvidia shares.
“Tech stocks will not go straight up and instead go through digestion periods as more data points are picked up across the supply chain and IT spending landscape which is a healthy process.”
Microsoft (MSFT), Palantir (PLTR), Salesforce (CRM) and Oracle (ORCL) are Ives’ top AI beneficiaries, a list that also includes cybersecurity companies such as Crowdstrike (CRWD), Zscaler (ZS) and Palo Alto Networks (PANW).
