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Are Semiconductor ETFs Better Bets on AI Boom Than Big Techs?
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Talks are doing rounds lately that billions of dollars that are being plowed into artificial intelligence (AI) by big tech companies will take longer to produce the expected return on investment. Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) stocks took a beating post earnings on this ground.
But all is not gloomy as there is no any “AI fatigue.” Semiconductors or chips — those necessary for AI developments — have been in high demand from big tech companies. The divergent reactions to Microsoft and AMD's earnings point to the market's current focus on AI-related investments and profitability.
While AMD leverages the ongoing infrastructure build-out by tech biggies, the likes of Microsoft and Alphabet face scrutiny over the pace of its AI revenue growth and the return on its substantial capital expenditures. The overall sentiment in the market reflects a cautious optimism as investors await clearer signs of profitability from AI investments.
Microsoft Slips on AI Doubts?
Microsoft saw a decline in its stock price following its recent earnings report. Despite reporting overall positive earnings, the company faced disappointment from investors due to its slightly missed expectations in the Intelligent Cloud segment, which includes its Azure platform.
Specifically, Azure’s revenue growth slowed from 31% in Q3 to 30% in Q4 of fiscal 2024, with concerns raised about the timeline for profitability from AI software sales. Analysts noted Microsoft's continued heavy investment in AI infrastructure, with capital expenditures rising to $19 billion, up from $14 billion in the previous quarter.
Despite these challenges, Microsoft highlighted growth contributions from AI to Azure revenue and expects supply constraints to ease by the second half of 2025. Google parent Alphabet also cautioned last week that its capital spending would stay elevated for the rest of the year. And the stock suffered (read: Microsoft ETFs Tumble as Q3 Cloud Growth Slows Down).
AMD's Strong Performance and Market Impact
In contrast, AMD (AMD - Free Report) saw its stock rise 4.4% on Jul 31 following robust earnings results. The company reported better-than-expected revenues in its Data Center segment, driven by increased demand for its chips from cloud providers like Microsoft.
AMD raised its sales forecast for AI chips for 2024, reflecting optimism in future growth opportunities. The positive momentum in AMD's stock acted as a cornerstone for the entire semiconductor industry as it benefited fellow chipmaker NVIDIA (NVDA - Free Report) , which saw a 12.8% surge in its share price on Jul 31.
Chip-making tools supplier Lam Research (LRCX - Free Report) also forecast September quarter revenues above Wall Street estimates on Jul 31, anticipating a surge in orders from chip firms amid the AI boom. There was a surge in demand for AI-powered chips.
What Does Meta Earnings Say?
Meta (META - Free Report) shares topped market expectations for its second-quarter revenues on Wednesday and provided an optimistic sales forecast for the third quarter. Shares jumped 7.2% after hours on Jul 31, 2024. Strong digital advertising spending on its social media platforms was sufficient for Meta to make up for the costs associated with its artificial intelligence investments.
Meta management indicated that new generative AI features like chat assistants would take longer to monetize. Notably, Meta has been investing billions in its data centers to take advantage of the generative AI boom. However, its shares fell in April following the announcement of a high-than-expected expense forecast.
Are Chip ETFs Better Bets Than Tech Giants?
The above-mentioned article indicates that demand for chips will be robust even if the return on deployment of those chips takes longer to materialize. Hence, if you are unsure about investments in tech ETFs, you can always bet on semiconductor or chip ETFs to capitalize on the ongoing AI boom.
These ETFs include Strive U.S. Semiconductor ETF (SHOC - Free Report) , AXS Esoterica NextG Economy ETF (WUGI - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ - Free Report) and TrueShares Technology, AI & Deep Learning ETF (LRNZ - Free Report) . AMD has about 6% to 7% exposure to those ETFs. In contrast, NVDA has about 15% to 30% exposure.
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Are Semiconductor ETFs Better Bets on AI Boom Than Big Techs?
Talks are doing rounds lately that billions of dollars that are being plowed into artificial intelligence (AI) by big tech companies will take longer to produce the expected return on investment. Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) stocks took a beating post earnings on this ground.
But all is not gloomy as there is no any “AI fatigue.” Semiconductors or chips — those necessary for AI developments — have been in high demand from big tech companies. The divergent reactions to Microsoft and AMD's earnings point to the market's current focus on AI-related investments and profitability.
While AMD leverages the ongoing infrastructure build-out by tech biggies, the likes of Microsoft and Alphabet face scrutiny over the pace of its AI revenue growth and the return on its substantial capital expenditures. The overall sentiment in the market reflects a cautious optimism as investors await clearer signs of profitability from AI investments.
Microsoft Slips on AI Doubts?
Microsoft saw a decline in its stock price following its recent earnings report. Despite reporting overall positive earnings, the company faced disappointment from investors due to its slightly missed expectations in the Intelligent Cloud segment, which includes its Azure platform.
Specifically, Azure’s revenue growth slowed from 31% in Q3 to 30% in Q4 of fiscal 2024, with concerns raised about the timeline for profitability from AI software sales. Analysts noted Microsoft's continued heavy investment in AI infrastructure, with capital expenditures rising to $19 billion, up from $14 billion in the previous quarter.
Despite these challenges, Microsoft highlighted growth contributions from AI to Azure revenue and expects supply constraints to ease by the second half of 2025. Google parent Alphabet also cautioned last week that its capital spending would stay elevated for the rest of the year. And the stock suffered (read: Microsoft ETFs Tumble as Q3 Cloud Growth Slows Down).
AMD's Strong Performance and Market Impact
In contrast, AMD (AMD - Free Report) saw its stock rise 4.4% on Jul 31 following robust earnings results. The company reported better-than-expected revenues in its Data Center segment, driven by increased demand for its chips from cloud providers like Microsoft.
AMD raised its sales forecast for AI chips for 2024, reflecting optimism in future growth opportunities. The positive momentum in AMD's stock acted as a cornerstone for the entire semiconductor industry as it benefited fellow chipmaker NVIDIA (NVDA - Free Report) , which saw a 12.8% surge in its share price on Jul 31.
Chip-making tools supplier Lam Research (LRCX - Free Report) also forecast September quarter revenues above Wall Street estimates on Jul 31, anticipating a surge in orders from chip firms amid the AI boom. There was a surge in demand for AI-powered chips.
What Does Meta Earnings Say?
Meta (META - Free Report) shares topped market expectations for its second-quarter revenues on Wednesday and provided an optimistic sales forecast for the third quarter. Shares jumped 7.2% after hours on Jul 31, 2024. Strong digital advertising spending on its social media platforms was sufficient for Meta to make up for the costs associated with its artificial intelligence investments.
Meta management indicated that new generative AI features like chat assistants would take longer to monetize. Notably, Meta has been investing billions in its data centers to take advantage of the generative AI boom. However, its shares fell in April following the announcement of a high-than-expected expense forecast.
Are Chip ETFs Better Bets Than Tech Giants?
The above-mentioned article indicates that demand for chips will be robust even if the return on deployment of those chips takes longer to materialize. Hence, if you are unsure about investments in tech ETFs, you can always bet on semiconductor or chip ETFs to capitalize on the ongoing AI boom.
These ETFs include Strive U.S. Semiconductor ETF (SHOC - Free Report) , AXS Esoterica NextG Economy ETF (WUGI - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ - Free Report) and TrueShares Technology, AI & Deep Learning ETF (LRNZ - Free Report) . AMD has about 6% to 7% exposure to those ETFs. In contrast, NVDA has about 15% to 30% exposure.