As NVIDIA and other AI giants plummet, Wall Street has a new favorite: "AI followers"

On Wednesday, NVIDIA (NVDA.US) and other AI giants experienced a sharp decline in stock prices. Looking ahead, Wall Street remains optimistic about the AI boom, but is now focusing on "AI followers" such as Intel (INTC.US) and AMD (AMD.US) whose performance this year lags far behind NVIDIA. Compared to popular chip giants like NVIDIA, Micron Technology, and Broadcom, which have seen gains of over 60% this year, the stock prices of Intel and AMD, the two major chip giants, appear much weaker.

Melius Research, a well-known investment firm on Wall Street, released a report stating that these "followers" in the AI field, such as Intel, AMD, IBM, and even Apple, may start catching up with leaders like NVIDIA, Microsoft, and Google in the second half of this year, leading a new wave of "AI investment frenzy."

Here, "followers" does not mean that they are lagging behind in AI technology, but rather that they entered a specific field relatively late, with much smaller market share or slower stock price growth compared to industry leaders. For example, while global AI chip leader NVIDIA holds close to 90% market share in data center AI chips, AMD's share is far behind NVIDIA. However, NVIDIA's dominant position undoubtedly faces a significant threat from AMD. Although Intel appears to have no market share in the data center AI chip market, its participation in AI PCs leveraging the x86 ecosystem advantage may boost Intel's valuation.

IBM, compared to leaders like OpenAI, Microsoft, and Google in the AI field, is undoubtedly at a relative disadvantage in market share. However, with a deep focus on the AI developer ecosystem and strong support from open-source alliances, IBM, as one of the "AI followers," is poised to gain a foothold in the vast market of AI large models. Whether Apple falls into the category of "AI followers" is debatable. On one hand, it is among the "Big Seven Tech Giants" and may have overextended expectations in terms of stock price. On the other hand, its entry into AI large models came very late, but with a strong iOS ecosystem, it may compete with OpenAI in terms of market share in large models.

According to fund managers and market strategists at BlackRock Inc., the world's largest asset management giant, and BNP Paribas Asset Management, a European asset management giant, the unprecedented investment frenzy surrounding artificial intelligence in the global stock market is far from over. A new wave of "AI investment frenzy" will continue to drive the global stock market's "bullish trend," setting new historical highs. Even economists predict that the optimistic sentiment driven by the development of AI technology will push the benchmark index of US stocks - the S&P 500 Index, to reach a historical peak of 7000 points in 2025.

Wall Street investment institutions are betting that after the previous AI frenzy that lasted for 18 months, the "Magnificent 7" tech giants may lose the momentum for further stock price surges. Therefore, they are shifting their focus to what Melius Research refers to as these "AI followers".

The seven tech giants with high weightings in the S&P 500 Index, known as the "Magnificent 7", include: Apple, Microsoft, Google, Tesla, NVIDIA, Amazon, and Meta Platforms. Global investors flocked to these tech giants throughout 2023 and the first half of 2024, betting that due to the massive market size and financial strength of tech giants like Apple and Google, they are in the best position to leverage AI technology to expand revenue.

Melius Research emphasizes that tech companies including Intel, AMD, and IBM, as well as Apple, have all fully entered the field of artificial intelligence. However, in 2023 and the first half of this year, they have failed to catch up with the biggest winners in the AI field, such as NVIDIA with its unparalleled growth.

In the past month, the stock performance of Intel, AMD, and IBM has been significantly better than that of the tech giants, while the stock performance of leading AI representative NVIDIA and other tech giants has slightly declined during the same period.

Intel may be the biggest AI winner in the new round of "AI investment frenzy". Trump's victory has become the basic consensus of most investors, and from the latest news, it appears that Trump, known as the "understanding king", may adopt more aggressive trade protectionist policies compared to when he took office in 2016 and during the Biden administration. It can be imagined that if the "understanding king", who advocates trade protection policies and urgently hopes for the reshoring of high-end manufacturing to the United States, successfully takes office, the subsidy support for Intel in the future may continue to escalate.

"AI followers" benefit from this strong trend: Shift in US stock investment style

It is crucial that not only are they in an advantageous position in terms of stock price gains, market sentiment, and profit expectations, but the performance threshold for the "AI followers" is also very low, indicating that achieving performance beyond expectations is much easier compared to the stock price surges of giants like NVIDIA, suggesting that they may be in a very favorable position for the remainder of 2024.

The shift in the style of US stocks will also help these "AI latecomers" to rise in stock prices. Recently, small-cap stocks in the US stock market have outperformed the seven tech giants by a wide margin. With the expectation of a significant rate cut by the Federal Reserve, market funds are starting to shift towards those companies outside the seven tech giants that have the potential for significant gains. After all, the valuations of the giants are already very high, and the market favors stocks that are cheaper and have some investment appeal in a rate-cut environment. Companies like Intel, among the "AI latecomers," undoubtedly fall into this category, not only carrying the AI label but also having strong fundamental support.

The index tracking small-cap tech stocks rose by 3% on Tuesday, marking the largest single-day increase since December last year, while the index of large-cap tech stocks fell by 0.4%. Although large-cap stocks have been the decisive factor in performance this year, small-cap stocks have been favored in the past month. The small-cap tech stock index has risen by over 10%, while the increase in large-cap stocks is only 3.8%.

Analyst Ben Reitzes from Melius wrote in a recent report, "We believe that companies with lower market expectations in the semiconductor, hardware, and software industries will see a 'catch-up' trading trend, with gains catching up to the high-valued industry leaders." He added that a similar situation occurred in 2023, where "weaker companies" in the first half of the year performed well in the second half.

It is worth noting that Reitzes includes Apple, one of the seven tech giants, in the list of "AI latecomers." Since April, the stock price of this consumer electronics giant has been steadily rising, especially since Apple showcased long-awaited AI features on its smartphones, leading to particularly strong performance.

The technology sector strategy team at Baird stated that investors are starting to shift towards stocks with strong fundamentals but very low performance expectations, especially those related to AI, leaving considerable room for their gains. He said, "The AI leaders have doubled in the past year and may face a slowdown in the future." "Even non-rocket scientists would think these stocks are over-owned, and those overlooked stocks may continue to catch up."

Baird also specifically mentioned other stocks that he believes will benefit from this trend, including software company F5 Inc., electronic measurement instrument company Keysight Technologies Inc., and semiconductor-related companies Diodes Inc., Coherent Corp., Lumentum Holdings Inc., and Aehr Test Systems.

In the first half of this year, large tech stocks such as NVIDIA, Microsoft, and Google boosted the entire US stock market, with their valuations reaching historical highs, putting their gains in a more challenging position for the remaining time in 2024. Citigroup's strategy team recently advised investors to implement profit-taking strategies on these tech giants and "rebalance a broader range of AI stocks across the entire value chain." Bloomberg Intelligence forecast data shows that the profit growth of the seven tech giants will significantly slow down. Meanwhile, stocks of AI big winners like NVIDIA and Microsoft are trading at a significant premium to their long-term P/E ratios, whereas laggards like IBM and Intel are valued much cheaper.

If the "AI King" Returns, Will Intel Be the Biggest AI Winner in the Second Half of the Year?

Investors generally believe that the attack on Trump may become one of the most important turning points in the U.S. election, strengthening Trump's political leadership image. Especially in the minds of his supporters, he is seen as one of America's historical heroes, with some media even comparing him to Roosevelt. To some Republican supporters, Trump surviving the bullet under "God's protection" means he is the inevitable next president. In contrast, weaknesses in on-the-spot reactions, speech logic, and party support rates of the Democratic opponent, current President Biden, are more pronounced.

The U.S. 2024 election prediction platform Polymarket shows that Trump's probability of winning in the November election surged by about 10 percentage points after the shooting incident, reaching 70%. Meanwhile, his competitor Biden's chances of winning further dropped to 18%.

Therefore, Trump's victory has become the basic consensus of the majority of investors. From the latest news, it appears that Trump, known as the "AI King," may have more intense trade protectionist policies compared to when he took office in 2016 and during the Biden administration.

It can be imagined that if the "AI King" who advocates trade protection policies and urgently hopes for the reshoring of high-end manufacturing to the U.S. successfully takes office, the subsidy support for Intel in the future may continue to escalate. Perhaps TSMC, the "king of chip manufacturing," will soon face a truly strong competitor in Intel.

Looking at Intel's stock price trend at the opening of the U.S. stock market on Wednesday, while many chip stocks like TSMC, ASML, and NVIDIA plummeted by over 5%, Intel surged by over 6% against the trend!

Perhaps the market has already begun to price in that Intel may become one of the biggest winners after the "AI King" takes office, and Intel, positioned as one of the "AI laggards," is expected to attract more and more funds in the second half of the year with its low stock price, undervaluation, and AI label. Its stock price momentum is expected to lead the entire U.S. chip sector.

Melius pointed out in a research report that AMD and Intel are expected to fully benefit from the AI PC wave. These two x86 architecture chip giants integrating CPU+NPU+GPU processor hardware will be used in new AI PC terminal devices running Microsoft Windows operating system. Meanwhile, Microsoft is set to introduce the "Recall" feature in its "Copilot+ PC," which Melius believes could be the upgrade reason closest to a killer application In Melius' view, AI PCs may be an important catalyst for Intel's continued stock price increase. Intel has been deeply involved in the x86 architecture CPU field on the PC side for decades, already possessing a strong software and hardware ecosystem, supply chain partnerships, and a large loyal user base in the PC domain.

Intel's newly launched Core Ultra processor integrates a neural processing unit (NPU) dedicated to AI inference acceleration with an Arc GPU into the CPU. This integrated CPU+NPU+GPU central processor is designed as the company's "most efficient processor," marking the official arrival of the AI PC era. Intel's Lunar Lake processor for laptops is scheduled to be launched in the second half of 2024, featuring a "brand-new low-power architecture and significant IPC improvements," with AI data processing performance of the GPU and NPU modules three times higher than Meteor Lake.

Research firm Canalys' latest forecast data shows that 2024 is poised to be the "Year of AI PC," with global AI PC shipments expected to reach 51 million units, accounting for 19% of total personal computer (PC) shipments. However, this is just the beginning of market transformation. It is projected that by 2028, AI PC shipments will reach 208 million units, with the share of total PC shipments expected to exceed 70%. The compound annual growth rate (CAGR) from 2024 to 2028 is expected to reach an astonishing 42%.