Why are AI chip stocks soaring? Is the rally sustainable?

In the limelight: The Nvidia headquarters in California. AI chips and the company are now at the centre of what some experts consider an AI revolution that could reshape the technology sector. — AP

SINGAPORE: Chipmaker Nvidia briefly touched a stock market valuation of US$1 trillion (RM4.6 trillion) on Tuesday, making it the first chipmaker to hit that major milestone.

The shares began trading at around US$397 (RM1,831) apiece on Wednesday, giving it a market valuation of US$988.7bil (RM4.56 trillion).

Fewer than 10 stocks have ever topped the US$1 trillion threshold, and with Nvidia’s milestone, it joins Alphabet and Amazon.com among US companies currently trading above this level.

Both Apple and Microsoft are valued above US$2 trillion (RM9.2 trillion).

Buoyed by a surge in demand for artificial intelligence (AI) technology, Nvidia shares have soared by about 180% so far this year.

Meanwhile, the Philadelphia Stock Exchange Semiconductor Index, which includes Nvidia and other AI semiconductor heavyweights such as Taiwan Semiconductor Manufacturing and Broadcomm, is up more than 40%.

In comparison, the tech-heavy Nasdaq Composite Index is up by just over 25%.

Nvidia is now the world’s biggest maker of the specialised chips needed to power generative AI, a new generation of AI technology.

Demand for the chips was triggered by the viral success of ChatGPT, a generative AI chatbot that can understand the context of complex queries and generate coherent answers in a conversational, human-like manner.

Last week, Nvidia issued an AI-fuelled sales forecast of US$11bil (RM51bil) for its second quarter, beating Wall Street targets by a long mile and resulting in its value jumping by US$184bil (RM845bil) in a single day.

During its earnings call, the company said generative AI is driving exponential growth in computing requirements, which in turn drove demand for its specialised graphics chips.

It claimed that the chips can handle AI workloads better than standard processors.

Nvidia chief executive Jensen Huang has since also unveiled an AI supercomputer platform that will help tech companies create their own versions of ChatGPT.

Nvidia’s share price rally has lifted other AI semiconductor stocks, such as Advanced Micro Devices and Marvell Technology, which are up by 92% and 75% respectively since the start of the year.

Prices of shares in companies like Microsoft, Alphabet and Meta, which have invested in generative AI, have also risen.

AEM Holdings was among the beneficiaries of the AI rally in the United States.

Shares of the firm, which provides testing equipment and services to the semiconductor industry, have risen by 12.5% over the past week to close at S$3.60 (US$2.60 or RM12) on Wednesday.

In a recent business update on May 11, AEM said: “Recent excitement over generative AI, such as ChatGPT, is fuelling the demand for AI-focused semiconductor devices to enable these solutions to be delivered to the masses at economically feasible rates.”

AEM noted that this would, in turn, drive demand for its products and services.

UMS Holdings saw its shares rise by over 8.7% in the past week, to S$1.06 (RM3.62) on Wednesday.

It provides equipment manufacturing and engineering services to the semiconductor industry.

Both AEM and UMS are among the most heavily traded tech stocks on the Singapore Exchange.

Experts agreed that demand for generative AI will only grow in the years to come.

Associate Prof James Pang, co-director of the NUS Business Analytics Centre, said the current surge in demand for generative AI is warranted and is not just hype.

“Generative AI is a big improvement for AI as a whole as it can be used across industries,” he said, adding that over the longer term, it will transform content generation functions and that companies could develop their own generative AI models to raise efficiency.

Laurence Liew, director of AI innovation at AI Singapore, a national AI programme launched by the National Research Foundation Singapore, said AI will continue to be a rapidly growing field with a wide range of potential applications such as in education, construction, healthcare and finance.

“Other parties along the value chain will also enjoy the growth of this sector including data centre providers, cloud providers, and hardware vendors like Nvidia, Intel and AMD,” he said.

But Nirgunan Tiruchelvam, head of consumer and Internet at Aletheia Capital, warned that investors who want to bet on this space should watch out for share price volatility arising from events such as the US debt ceiling debate and avoid getting over-excited about the recent rally in stock prices.

“While there is no doubt that AI companies will perform well in the long term, investors should avoid placing their bets on single stocks and go for exchange-traded funds with AI exposure to better manage the risks.” — The Straits Times/ANN

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