AI is On Fire. Is it Time for S’More?
Or Will the General Marketplace Drag Everything Down?
Artificial intelligence and machine learning are affecting all parts of our lives, from autonomous vehicles, to the way that social networks decide which ads we see, and how law enforcement tracks down criminals. The industry is on fire. Should you buy in?
Advanced Micro Devices just announced 4Q 2019 earnings, with revenue of $2.1 billion, which is up 50% year over year from 2018’s $1.42 billion. Net income was also impressive at $170 million, versus $38 million in the 4th quarter of 2018. Nvidia is projecting revenue growth of about 34%, when the company announces earnings around Feb. 21, 2020.
AMD announced earnings after the markets closed. Investors responded by selling off. The share price dropped 4.12% in after-hours trading today. Hmmm. Why are investors getting cold feet over one of the hottest companies and industries on the street? This is where AI has something in common with cannabis 2018. It’s got a lot to do with valuation, and less to do with quarter by quarter fluctuation. AMD announced that the next quarter will have $1.8 billion in revenue, which represents year over year growth of 42%, but is a sequential drop of about 15%. AMD explains the sequential drop as seasonality and the calm before the next gen product release. By comparison, Apple announced revenue for the last quarter of $91.8 billion, and forecasts that the next quarter revenue will be $63-$67 billion. That’s a 27% sequential drop!
If customers like Dell, IBM, Nokia and others are choosing an AMD competitor, and the sequential drop is an indication that AMD is falling behind the pack, then it’s understandable that investors would opt out. However, investors are far more likely to get skittish if they are “out over their skis.” If you worry that you might have overpaid to begin with, or that your recent windfall might evanesce, then you’re more likely to bail out with as much as you can as quickly as possible. Should a company with full year income of $341 million be worth $56 billion, with a price to earnings ratio of 245? (The historical average price to earnings ratio is about 17.) Nvidia’s price to earnings ratio is 68.
Artificial intelligence is definitely an industry of tomorrow, something that is reflected in our daily lives and in the revenue growth. The question is only one of price. You could have purchased Nvidia for $131/share last May. Should you be jumping in today for $250/share? AMD has more than doubled, to $52 from $19. However, can the AMD share price remain high if the general marketplace weakens? That’s another headwind that investors have to factor in.
4Q 2019 U.S. GDP
Tomorrow, the Federal Reserve Board will release their statement on the economy. The governors are widely predicted to hold rates where they are.
On Thursday, January 30, 2020, at 8:30 am ET, the Bureau of Economic Analysis will release the advance estimate of the 4th quarter U.S. GDP growth. Projections are coming in at 1.2-1.8%. That’s a very weak showing, which is likely why the Dow Jones Industrial Average is down 651 points since the high set on January 17, 2020. Stock futures are down, predicting a slight sell-off again tomorrow.
In the late stage of the business cycle, even with one of the hottest industries in the world, price matters.
Incidentally, I did find one AI company, which is trading near its 52-week low, that is partnered with Microsoft on face recognition.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.