AI Stocks Decline as Investors Seek Safer Options

Over the past 20 months, artificial intelligence (AI) stocks have driven a significant stock market rally. However, recent trends have shifted from high-growth investments to safer options, largely driven by concerns about a potential economic slowdown. This shift has had a noticeable impact on several once-prominent AI stocks.

Bank of America analysts, led by Mariana Pérez Mora, highlighted this trend in a recent note to clients. Following the earnings report from Palantir, a key player in the AI sector and a defense contractor, they observed that “AI tourists have started to depart.” Unlike many other AI stocks, Palantir has remained resilient, gaining 8% over the past month, standing out as an exception in an otherwise declining market.

Nvidia, a dominant force in the AI semiconductor industry, has not fared as well. Over the last month, the company’s shares have dropped 21%, despite a brief recovery. Nvidia’s stock is trading nearly 30% below its June peak, resulting in a significant loss of about $700 billion in market value over the past six weeks.

Other tech giants heavily invested in AI have also experienced substantial declines. For instance, Amazon and Microsoft, two major competitors in cloud computing, have seen their shares fall by 16% and 12%, respectively, over the last month. Nvidia’s peers in the semiconductor industry, such as Advanced Micro Devices (down 25%), Broadcom (-16%), Intel (-43%), Qualcomm (-21%), and Taiwan Semiconductor (-11%), have similarly struggled.

Smaller companies producing technology for generative AI have not been spared either. Lam Research saw its stock plunge by 28%, Marvell by 18%, and Super Micro Computer by 44%.

Mariana Pérez Mora likened the rush to invest in AI to the California gold rush of the mid-1800s. She noted that both events were characterized by “hundreds of thousands jumping in with the hopes of making a fortune.” While some fortunes have been made in both cases, the “AI Rush” now appears dry.

Despite the pullback, some investors still see value in AI stocks, particularly those that have become more affordable due to recent declines. According to Morgan Stanley research, Nvidia’s stock is trading about 30% below its five-year average price-to-earnings (P/E) ratio, a metric that compares market value to projected future profits. This puts Nvidia’s current P/E ratio nearly at the same level in November 2022, just before the launch of the ChatGPT generative AI chatbot that sparked the recent AI frenzy.

Erik Woodring, leading the Morgan Stanley team, pointed out that the “Magnificent Seven” — a group of American tech giants including Apple, Microsoft, and Nvidia — are now trading at about a 7% discount compared to their average P/E valuations over the last five years. Woodring warned that these valuations could still face significant downside risks in a “black swan” event or recession scenario. However, he also noted that the current valuations relative to future growth prospects are attractive after the recent market downturn.

Concerns about a weakening U.S. economy have intensified, particularly after the U.S. reported its highest monthly unemployment rate in nearly three years last Friday. Tech stocks are historically sensitive to economic slowdowns, as they rely heavily on external spending and internal investments to develop new products, such as AI models. Adding to the pressure, the unwinding of the “carry trade” over the weekend — where traders borrowed at near-zero interest rates in Japan to invest in riskier assets like American tech stocks — further exacerbated the decline in tech stocks. This sell-off resulted in the “Magnificent Seven” losing a staggering $650 billion in market value during Monday’s trading session.