Returns in the stock prices of technology companies have cooled as of late, marking a sharp change from the experience of the previous year. Performance to date in the third quarter of 2024 is listed below for the so called ‘Magnificent 7,’ and the data show a significant slowdown compared to recent history. An equal weight portfolio of the selected stocks would have returned -0.04% thus far in the third quarter, according to FactSet data, much lower than the year leading into this quarter which showed a gain of +54.72%.
Investors are tasked with forecasting the future earnings potential of each company and appropriately discounting to today’s value. With a clear slowdown in stock returns, investors may be anticipating a slowdown in fundamental growth. It may serve investors well to revisit some of the headlines that affected the sector during this quarter.
The emergence of Artificial Intelligence (AI) in late 2022 has catalyzed much of the positive returns in technology stocks. However, investors got their first glimpse that growth is potentially limited during this quarter. During Alphabet’s quarterly earnings call, CEO Sundar Pichai noted that “the risk of underinvesting [in AI technology] is dramatically greater than the risk of overinvesting for us.” For those skeptical of the AI-fueled gains, it gave a reason to suspect that some of the largest tech companies are at least cognizant of potentially overinvesting and that future growth may not be as high as currently anticipated. It’s noteworthy to highlight that Nvidia stock declined roughly 25% from the day those comments were made by Mr. Pichai on July 23rd to an intraday low on August 5th.
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For the investor believing AI is indeed catalyzing a generational technology refresh, there are reasons for optimism. Data from Google Trends, pictured below, shows that search activity for “ChatGPT” reached an all-time high just this week. ChatGPT, one of the first and most well-known Large Language Models (LLMs) continues to dazzle users with new features and propel its popularity to new highs, with a new model released just this past week. It serves as a stark reminder that innovation and rapid product releases are one of the hallmarks of investing in technology companies.
Future usage of LLMs, such as ChatGPT, may get another boost to growth with the release of the iPhone 16 and the associated integration with LLMs. DemandSage estimates that ChatGPT saw 200 million weekly active users in July 2024, an impressive feat for such a young company.1 But it may be only Act 1, to borrow a phrase. ChatGPT’s integration into the Apple ecosystem, such as becoming the preferred LLM on iPhones, may open the application to a market of over 1 billion active devices. A connection to these cutting-edge applications with less friction may mean a surge of new users could be just over the horizon.
While the third quarter of 2024 has provided technology investors with lackluster returns compared to recent history, investors are tasked with assessing the current growth landscape. Executives have become cognizant of overspending and overinvesting in such pricey technology. Yet, usage continues to grow and hit new highs among ChatGPT, due both to advancing capabilities and a broader set of distribution lines for users to gain access with. Investors may be well served to look at growing usage among new technologies and assess if these trends continue.
For more content by Blake Anderson, Senior Analyst, Investments click here.
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