An AI Bubble?

Brit Ryle

Posted May 26, 2023

You get a 25% one day post-earnings ramp job that adds $200 billion to an already mega-cap tech stock that’s smack in the middle of an emerging tech trend, and yeah, you’re gonna get some grumpy folks yelling “bubble!”

Grumpy, because they’ve probably not made any money on AI stocks…

And bubble, well, that’s what grumpy people call emerging tech trends that they’ve missed out on, or don’t understand. 

I don’t want to dwell on the “bubble” thing for too long. Let me just say that bubbles aren’t bubbles until they pop. Before that they are “emerging tech trends.” And the best money you’ll ever make in the stock market is when a tech trend emerges. 

If we mark the start of the Artificial Intelligence trend from the launch of Chat GPT on November 30, 2022, that means we’re 6 months in. AI is still emerging, and the investment community is already being surprised at how powerful it is, as we learned Wednesday evening…

Before Nvidia (NASDAQ: NVDA) crushed expectations on Wednesday night by reporting $7.2 billion in revenue when analysts were looking for $6.5 billion, Nvidia was worth around $755 billion. By the end of Thursday trading, Nvidia was worth $940 billion.

That $184 billion addition to its market capitalization is the biggest dollar amount gain for any company, ever. 

But it wasn’t the extra $700 million ($7.2 billion vs $6.5 billion) the company took in during the first quarter that launched the stock higher. It was the forecast for the current quarter – analysts were thinking Nvidia would take in $7.2 or so. Nvidia said, w-e-e-e-ll, it’s gonna be more like $11 billion…

39 analysts cover Nvidia. It is their job to keep tabs on how Nvidia’s business is going. Manufacturing, orders, deliveries – all that. And they missed Nvidia’s sales by 50% – in the current quarter. The orders are in, deliveries being made, and the analysts still missed by a wide margin…

I don’t mean to indict the analysts. Of course revenue and earnings estimates always get low-balled for most companies, so the companies can then beat the number and get a little pop for the stock – that’s just how the game is played. But when you have 39 analysts covering a stock, you’d think one or two would at least get close…

The fact that they didn’t explains why Nvidia added $184 billion to its value in one fell swoop. Nvidia’s business is booming because companies are investing in Artificial Intelligence (AI) as fast as they can. 

I’ve already delighted audiences both young and old with my coverage of a few AI stocks. You can check out my analysis of C3.ai (NASDAQ: AI), Schrodinger (NASDAQ: SDGR) and Lemonade (NASDAQ: LMND) here, here and here.

Today, I have a couple new ideas for you…

$1 Trillion Dollar Investment

Nvidia CEO Jensen Huang explained it this way: “A trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process.”

Now, if Mr. Huang is right, and there is $1 trillion of data center infrastructure that needs to be upgraded to become powerful enough to run AI applications…and Nvidia is capturing “only” an $11 billion dollar slice of that pie in the current quarter, well, I’m not surprised that Nvidia analysts have already raised their revenue estimates for the rest of this year and all of next year by 50%.

And I’m not surprised by yesterdays 25% rally either. 

Now obviously, data centers will have to spend a lot of money for the upgrades that Mr. Huang is talking about. But the revenue forecasts for the whole data center sector suggest that it will be well worth it. 

The global data center industry took in $321 billion in 2022. 2023 revenue for the industry is expected to hit $350 billion or so. But the revenue growth over the next few years could be explosive: compound annual growth rate (CAGR) estimates for data center revenue range widely from 5% to 13%, suggesting that global data center revenue could range from  between $420 billion to $505 billion by 2027.

But of course, these estimates do not take into account the demand of AI applications. 

There is clearly upside to revenue growth expectations, and that’s why data center stocks are rallying today…

Digital Realty Trust (NYSE: DLR) is a data center real estate investment trust (REIT) – it’s rallying 8% today, to right around $100 a share. It’’s 52-week high is $141 a share and its all time highs came at the end of 2021 at $176 a share. Plus it pays a ~5.5% annual dividend. 

For more conservative investors, I expect Digital Realty Trust will make a very solid “picks and shovels” play on the growth of data services driven by AI. 

I’ve said before that I think Amazon (NASDAQ: AMZN) is being overlooked as an AI play. And it’s because of Amazon Web Services (AWS). AI companies (like the aforementioned C3.ai) already host their services with Amazon Web Services. And AWS is partnering with these companies and bundling their services into its own AWS branded offerings. 

AI applications from AWS will be a very attractive option for smaller companies that don’t have the time or budget to build out their own AI applications. And I’ll bet you dollars to donuts that interest in the AI applications at AWS are through the roof.

Then there’s the REIT that builds fulfillment centers and data centers for Amazon, Walmart and other companies, Prologis (NYSE: PLD). Prologis will benefit from increased spending from Amazon, Walmart and others. It pays a 2.8% dividend that’s been hiked every year since 2011. 

And the timing is good – up ~$2 a share today to $124, Prologis is just breaking above its 50-day moving average, which suggests the sideways trend the stock has been stuck in for the last 6 weeks may be changing into an uptrend. 

The 52-week high for Prologis is up around $140 and all time highs are around $170. 

Ok, that’s it for me this week, take care, enjoy the holiday weekend and a big THANK YOU to all current servicemen and women and veterans reading Pro Trader Today. My publisher Dave and I very much appreciate you…

Briton Ryle
Chief Investment Strategist
Pro Trader Today 

brit.ryle@protradertoday.com

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