Why are AI semiconductor stocks down as business booms? … the shift that’s happening in the sector … be careful of Nvidia today … Luke Lango’s newest AI portfolio

In 2021, a research report from McKinsey & Company concluded:

Artificial intelligence/machine learning (AI/ML) has the potential to generate huge business value for semiconductor companies at every step of their operations, from research and chip design to production through sales.

So, a question…

With demand for AI exploding… and with semiconductor companies standing to generate huge business from AI… why has the iShares Semiconductor ETF (SOXX), which holds many of the biggest chip companies in the world, been in a downward channel for months?

Our technology expert Luke Lango has the answer:

Previously, it looked like all (or at least a bulk) of that $15.7 trillion would flow into Nvidia, TSMC, and other major AI chipmakers.

Now, though, that $15.7 trillion is being reshuffled.

Instead of flowing into Nvidia and other big chipmakers, that cash will be funneled to smaller chipmakers that are better equipped to create specialized, custom AI chips.

That’s why big semiconductor stocks have been breaking down.

There’s a lot to unpack here. But if you’re an AI investor – especially if you’re invested in Nvidia or other massive semiconductor stocks – it’s critical to understand the what’s happening.

After all, SOXX is down 11% since July 31st and Nvidia has been down as much as 18% since September 1st (it’s trimmed some of those losses recently). If Luke is right, this is just the beginning of even bigger losses, even though the AI megatrend is gathering momentum, attracting trillions of dollars of investment capital.

***The great shift happening within the AI semiconductor sector

Nvidia has been the posterchild for AI investing in 2023. And this is for good reason – as the preeminent AI semiconductor manufacturer, Nvidia has enjoyed explosive growth in demand for its chips this year.

For example, back in the summer, Nvidia reported that its Q2 revenue growth was 101% greater than that of Q2 2022… its Q2 earnings per share were 429% greater than Q2 last year… and its Q3 guidance was 170% higher than the same time last year.

This eyewatering growth has translated into explosive share price growth. On the year, Nvidia is up 211% as I write Monday morning.

But the dynamics that supported Nvidia’s phenomenal earnings performance this year are changing. It’s critical that investors recognize this shift and get out in front of it.

To set the stage, here’s Luke:

We think it’s fair to say that AI will change the world profoundly. Self-thinking machines and software algorithms have the potential to improve productivity exponentially.

In fact, over the next 20 years, they’ll likely transform the global economy in more profound ways than even the internet has over the past 20 years. 

But AI faces one critical problem: too much demand and not enough supply. 

To illustrate the problem, Luke highlights research from IT research and consulting service Gartner. Six months ago, less than 20% of companies were using AI in their business operations. Today, nearly 60% of companies are incorporating this technology. That’s a 3X increase in only six months.

But this is just the beginning. A tsunami of corporate AI-adoption is headed our way.

Here’s Luke with those details:

A recent KMPG survey of U.S. CEOs found that nearly 75% will make AI a “top investment priority” in 2024.

About 85% of those CEOs believe they will see a return on those AI investments within five years.

The demand for AI is enormous right now. 

But the supply is scant.

***Huge demand and low supply seem fantastic for the big chipmakers, so why are they struggling?

Luke explains that cutting-edge AI programs require incredibly complex and highly specialized chips. These advanced chips are expensive and require lots of time to manufacture.

With only a handful of companies having been able to produce these chips, the result has been massive supply constraints. This has been great for Nvidia, while not so great for the frustrated buyers who want their chips immediately.

And this frustration is where we begin the great shift that’s happening in the AI sector today.

Back to Luke:

…Supply constraints are starting to rear their ugly head. 

Previously, Nvidia’s customers were more than willing to pay a premium and wait months on end for their AI chips. But that’s no longer proving true.

And now those same customers are going at it themselves. 

***The big chipmakers are victims of their own success

Outsized profit and success breed competition. Even more so when frustrated buyers can’t get what they want so they’re more primed to jump ship from their prior supplier.

As Luke pointed out earlier, whereas the coming $15.7 trillion of AI-related investment wealth appeared to be flowing into Nvidia, TSMC, and other major AI chipmakers, we’re now seeing a redirect toward smaller chipmakers that are better able to meet the specialized needs of their clients.

Here’s the The Information, a technology business web site, echoing Luke’s analysis, pointing toward a new wave of upstarts:

Nvidia dominates the market for graphics processing units used to train artificial intelligence models, although rivals like AMD and Intel are trying to catch up.

Now some scrappy startups are entering the fray with alternative designs for AI chips they claim work better and more efficiently than Nvidia’s GPUs. Other startups are targeting Nvidia’s app-writing software, which keeps companies using its chips.

Young companies such as d-Matrix and Rain Neuromorphics are pitching their chips and software as a way for companies to reduce the costs of training and running machine-learning models compared with Nvidia’s products.

Tiny Corp and Modular are developing alternatives to Cuda, an Nvidia programming language that lets developers speed up their applications and that only works with Nvidia’s GPUs.

Three of the startups we profile here—Qyber, Modular and MatX—were founded by engineers who previously worked at Google, which sells AI chips that aim to rival Nvidia’s. That’s a sign ambitious tech entrepreneurs feel they can make a dent in the sector, despite the deep-pocketed competition.

***But it’s not just private companies that are threatening the massive semiconductor companies

Last week, Luke held a live event during which he discussed a small group of publicly traded AI stocks that he believes will reward investors vastly more than the massive chipmakers like Nvidia over the next several years.

As part of the evening, Luke unveiled a new portfolio of seven AI stocks to capitalize on this shift. They’re all showing gains as I write, and one has already shot up 23% since last Wednesday.

If you’re more of a do-it-yourself investor, you can begin your research with a semiconductor ETF like SOXX. The specific holdings in such an ETF will provide you a laundry list of chip stocks to consider for greater analysis.

For example, the top 10 holdings in SOXX are:

• Advanced Micro Devices
• Broadcom
• Nvidia
• Intel
• Texas Instrument
• Qaulcomm
• Micron
• KLA
• Applied Material
• Analog

If you go this route, just be sure that whatever stock you pick is poised to capitalize on the shift we’ve discussed today. On that note, I’ll add that Luke’s new portfolio contains none of these Top-10 holdings in SOXX.

***Nvidia has been fantastic for investors here in 2023, but if Luke’s right, that gravy train is winding down

Replacing it is a new crop of AI semiconductor leaders that are about to take over.

Back to Luke:

We finally sold our NVDA position in our Innovation Investor service for a ~1,000% return.

We’re looking to take those profits and roll them into the next batch of top AI stocks to buy. 

You see – all the money that was being spent on Nvidia chips won’t go away in 2024. It will just be spent on different, more customizable AI chip makers. 

That means that next year, Nvidia’s pain will be someone else’s gain. 

This is the AI Turning Point – the critical shift that will define what stocks win and lose next year. 

For more details on this AI Turning Point, as well as a free stock giveaway (Luke’s favorite AI stock today), just click here.

Have a good evening,

Jeff Remsburg