Is the AI dream starting to fade behind the sell-off of tech stocks at the beginning of the year?

At the beginning of 2024, the US technology stocks, which had been rising for a year, opened with a sharp decline. The Nasdaq 100 plummeted by 1.7%, marking the largest single-day drop in four weeks. High-flying stocks suffered heavy losses, with AI core target NVIDIA falling by 2.73%, AMD dropping nearly 6%, and ARM plunging over 8%. The seven tech giants collectively dropped more than 2%, with a market value evaporating over $238 billion. Among them, Apple, the largest in market value, fell by 3.58%, marking the largest single-day drop in five months and losing hundreds of billions of dollars in market value overnight.

It turns out that after a year of AI hype and soaring valuations, the patience of the capital market has run out, and the path of relying on storytelling and bubble blowing is no longer viable. In 2024, real performance results must be seen in order to sustain the momentum.

However, Wall Street analysts predict that the revenue generated by AI in the 2024 fiscal year will only have a low single-digit growth potential.

Few companies actually make money from AI

Cost reduction and efficiency improvement remain the main theme of global technology stocks, and the AI spending of many companies still appears to be quite limited.

Therefore, even cloud computing companies that have purchased a large number of NVIDIA chips have not really made much money from the AI boom. Last year, as business slowed down, many tech companies underwent significant layoffs and other restructuring actions. The major customers of cloud providers generally reduced their spending. The cloud computing businesses of Amazon, Microsoft, and Google, the three major cloud providers, have all seen a noticeable slowdown in growth compared to previous years.

However, despite limited performance growth, the stock prices of these three companies have risen considerably, with Microsoft soaring by 57%, achieving its best annual performance since 1999. As a major investor in OpenAI, Microsoft is also one of the tech giants that has deployed AI in its products the fastest, giving it a competitive advantage.

However, in a report in December, investment bank Jefferies pointed out that artificial intelligence and machine learning "are not the main drivers for customers to increase cloud spending." Bernstein analysts also stated in a report on December 19 that "chief information officers are generally still in the exploration stage of artificial intelligence."

As a massive enterprise with annual revenue exceeding $200 billion, it is still difficult to say how much performance boost AI will bring to Microsoft. Many of Microsoft's enterprise customers are still in the early stages of experimenting with AI and are unlikely to invest heavily in AI services.

Delayed AI applications dampen stock market speculation

Wallstreetcn.com pointed out in a previous article that at this stage, the main beneficiaries of the AI boom are infrastructure layer companies represented by NVIDIA. The huge demand generated by model training has continued to validate their orders and performance.However, the application of AI in the B2B sector is still in its early stages, and most AI application vendors have not yet entered the commercialization stage. It is expected that it will take 2-3 quarters longer than the infrastructure layer to fulfill its promise.

Taking AI application leader Adobe as an example, in the past year, Adobe's stock price has risen by more than 70%. Investors have high expectations for Adobe's generative AI tools, such as the document-to-image application Firefly, believing that AI applications like Firefly can drive a significant increase in Adobe's software demand.

However, in Adobe's earnings report in December last year, the revenue growth forecast for the new fiscal year was quite conservative, at only 10%, which is the same as the previous year. Although most analysts believe that this number is conservative, it still caused Adobe's stock price to continue to decline.

Starting later this month, similar sentiment changes may trouble many technology companies that release quarterly reports. If AI applications do not deliver better-than-expected performance, stock prices may also be at risk.

Scotia Capital software analyst Patrick Colville warned in a previous report that the impact of AI on performance may be later than many people expected. Alex Zukin, an analyst at Wolfe Research, also believes:

"We are currently at the peak of the AI hype, and it is likely to fall into the valley of disillusionment because actual generative AI revenue takes longer to materialize. The revenue expectations for the 24 fiscal year have at most a low single-digit upside."