CIO maintains their preference for semiconductors and software, and see opportunities in beneficiaries of AI edge computing, big tech, and their partners. (UBS)

More importantly, the company gave a strong revenue guidance of USD 24bn for the quarter ending in April, on solid artificial intelligence (AI) demand. Nvidia shares jumped as much as 11% in extended trading following the announcement, while Nasdaq and S&P 500 futures are up 1.5% and 0.8%, respectively, before the US market opens.


The results come as a relief for AI bulls, as expectations have improved significantly after the strong year-to-date rally in AI-related stocks. But despite a 24% advance in the tech-heavy Nasdaq since late October last year, we continue to see potential for further gains in technology stocks, especially those that would benefit from the AI revolution:


Increasing AI infrastructure spending points to strong demand. Nvidia’s strong results and guidance point to overall solid AI infrastructure spending trends, which were also evident in recent earnings reports from leading tech companies including Microsoft and Alphabet. We have forecast a 15-fold growth in overall AI industry revenue between 2022 and 2027 to USD 420bn. But our estimates could prove to be conservative in light of recent developments like Open AI’s text-to-video model Sora and management commentary from Nvidia. Chief executive officer Jensen Huang said that inferencing—the process of running live data through a trained AI model to make a prediction or solve a task—now accounts for some 40% of its data center division revenues. This, to us, highlights a broadening in AI demand trends, in addition to deep learning training.


AI monetization is improving. There is now a wide availability of AI applications in copilots, cloud, models, and other software, and the product pipeline remains strong. In addition, the acceleration in cloud revenue growth reported by Microsoft and Alphabet due to rising contributions from AI also points to a pickup in AI monetization. We expect the applications and models segment to emerge as the dominant force in the medium to long term, and forecast a 152% compound annual growth rate in revenue during 2022–27.


Earnings growth for the tech sector is robust, justifying its valuation premium. Given the strong AI-related tailwinds, we see 18% year-over-year earnings growth in 2024 for the global tech sector, including information technology and internet. While the sector’s forward price-to-earnings ratio is still close to a 22% premium versus its 10-year historical average, it has fallen from a peak of around 34 times in April 2021 to around 27 times today. We believe this is reasonable considering the sector now has a more recurring revenue profile. Separately, the US tech sector’s return on invested capital over the last 12 months stands at 20%, the highest among all 11 US equity sectors.


So, we think the near-term momentum in AI-related stocks is likely to continue. To position, we maintain our preference for semiconductors and software, and see opportunities in beneficiaries of AI edge computing, big tech, and their partners.


Main contributors – Solita Marcelli, Mark Haefele, Daisy Tseng, Sundeep Gantori, Vincent Heaney, Jennifer Stahmer


Read the original report : Tech rally has room to run amid solid AI demand, 22 February 2024.