Artificial Intelligence Stocks Face Uncertain Future in 2024
The year 2024 could prove to be a challenging one for artificial intelligence (AI) stocks, with several factors indicating potential difficulties ahead. While AI has generated significant enthusiasm and investment, historical patterns show that these next-big-thing technologies often face challenges in the short term. Furthermore, the capacity to meet the growing demand for AI technology presents a significant obstacle. Additionally, the valuations of AI stocks may be cause for concern, as they face high expectations and economic uncertainties.
Historically, many highly anticipated investments have failed to live up to their initial hype. It takes time for new technologies to mature, and often investors overestimate their adoption rates. We have seen this with previous trends such as the internet, which experienced significant share price drawdowns before realizing its potential. Although AI holds promise, it is important to recognize that all trends need time to develop and face challenges along the way.
Capacity is another pressing issue for the AI industry. With businesses across various sectors eager to embrace AI, meeting the demand and satisfying investor enthusiasm becomes increasingly difficult. One report highlights two key capacity constraints: high-bandwidth memory (HBM) and chip on wafer on substrate (CoWoS). HBM, crucial for data center graphic processing units (GPUs) powering AI technologies, is in short supply. CoWoS, necessary for HBM integration, has limited alternatives, and expanding its capacity takes time. As a result, the industry’s leading GPU provider, Nvidia, has reached its maximum capacity until chip fab companies like Taiwan Semiconductor Manufacturing Company (TSMC) expand their operations.
Moreover, valuations of AI stocks could be cause for concern. Wall Street’s lofty expectations may prove challenging to meet. For example, Nvidia’s shares have become increasingly pricey, trading at approximately 44 times sales and nearly 168 times trailing-12-month cash flow. Even though the company’s fiscal second-quarter guidance surpassed expectations, it is uncertain whether Nvidia can sustain such a valuation. Similarly, AI software company C3.ai’s sales growth is relatively average for the industry, and the company has yet to deliver a profitable year since going public. These high valuations may come under scrutiny if the US economy weakens, as traditional metrics like the price-to-earnings ratio regain prominence.
Looking ahead to 2024, the future of AI stocks remains uncertain. While AI holds significant promise, investors need to be mindful of historical patterns and recognize that all trends require time to develop. The limitations in capacity and potential challenges in meeting demand pose additional obstacles. Valuations also warrant consideration, especially in the face of economic weakness. By taking a balanced view of the challenges ahead, investors can better navigate the AI market and the potential risks it presents.
