Summary
Highlights
Nvidia has been crowned the king of AI with a 1200% surge in stock price and a fivefold increase in revenue over the last two years. However, new alliances are forming against Nvidia. Anthropic has partnered with Google Cloud for 1 million TPU chips and Open AI has signed a deal with Broadcom to buy $10 billion worth of custom AI chips. AMD is also deploying 6 gigawatts of its Instinct GPUs to Open AI, making it a significant competitor.
Despite increased competition, Nvidia's shares have remained stagnant since July, and its revenue growth is expected to slow to 33% next year, half of this year's 58%. The deals made by Anthropic and OpenAI are mainly driven by the immense demand for AI chips that Nvidia cannot fully meet. Each hyperscaler customer, like Alphabet, Microsoft, and Amazon, is developing its own chips. Nvidia's $275 billion revenue and double-digit growth rate are becoming more vulnerable as competition intensifies.
While Nvidia may not be overthrown, investors should diversify their portfolios by investing in other chipmakers and the broader AI supply chain. AMD shares are up 110% this year, offering a more reasonable price-to-sales valuation than Nvidia. Other strong companies in accelerators include Broadcom (AVGO) and Marvell Technologies (MRVL). In data center servers, Super Micro Computer (SMCI) is a key player, despite a recent cut in its current quarter outlook. Arista Networks (ANET) is another important stock for data center networking.
SoFi Technologies (SOFI) will report earnings this week, with the stock up 88% this year. However, it is considered priced to perfection at 4.5 times price-to-book value, making it susceptible to downside risk. Fiserv (FI) is also reporting earnings and is seen as a potential rebound story, priced at 12 times price-to-earnings. Fiserv's move into stablecoins for its 3,000 regional banks and 10,000 institutional clients could unlock significant value.
To protect against a potential AI bubble, investors can consider put strategies on highly valued, pre-revenue energy AI startups like Ollo (OKLO) and Fermi (FRMI). These options act as an insurance contract, offsetting potential losses in other AI stocks. Last week, nine of eleven stock sectors closed higher, with energy stocks rebounding. Real estate stocks are best positioned for a near-term rebound due to lower borrowing rates and a slow recovery in office properties.
Despite the ongoing government shutdown, corporate earnings remain strong, with S&P 500 companies reporting a 9.2% increase in profits year-over-year. Although stocks are expensive, high profitability and a jobless expansion contribute to rising productivity and corporate earnings. The Federal Reserve is expected to cut interest rates again, which would lower borrowing costs for businesses and continue to support stock market growth.