Artificial Intelligence Report. Micron Banned by China. Intel Slashes Dividend.
Artificial Intelligence Report. Micron Banned by China. Intel Slashes Dividend.
Artificial intelligence is one of the hottest industries in the world today. ChatGPT dropped November 2022, and since then has spread like wildfire. For many entrepreneurs, our virtual assistant has become as indispensable as the C-Suite executive secretary. At the same time, Intel slashed their dividend by 66% in February, and on Monday Micron Technology was banned in China. Revenue is plunging for all AI companies.
So, how does AI look for investors? Is this an industry you should be leaning into or underweighting? Are AI stocks on sale or overpriced? Is the revenue rout temporary, or will it be reversed?
Micron was banned in China on Sunday, May 21, 2023. The company said that it expects a revenue impact in the single digits. However, the CFO Mark Murphy also indicated that about a quarter of Micron’s revenue comes from companies headquartered in China, either directly or indirectly. The Chinese ban comes at a time when Micron was already losing revenue, with the 1st quarter revenue down -53%.
Before the ban, the company was projecting $3.7 billion in revenue for the June quarter of 2023. That’s likely to be a miss now. Revenue could plunge by -60% or more year over year.
Micron has a lot of cash on hand – $9.8 billion as of March 2, 2023. However, they burned through $2.3 billion in the first quarter. Will the company have to slash their dividend (like Intel) to conserve capital through the challenging climate they find themselves in? The share price has held strong since the unexpected news of the Chinese ban. Micron shares, like other high-profile technology companies, are still very expensive, with a price/earnings ratio of 48.
TikTok Banned by Montana
It is worth noting that Micron was banned just a few days after TikTok was banned in Montana (on May 17, 2023). Details of whatever the Micron security breach is that the Chinese regulators are concerned about have yet to emerge. However, we are seeing continued stress between Chinese and U.S. relations, which is still weighing on Chinese equities that are traded on the NYSE or NASDAQ stock exchanges.
Intel cut its dividend by 66% on February 22, 2023, slashing it from 36½ cents per share to 12½ cents. According to the Intel press release, “The improved financial flexibility will support the critical investments needed to execute Intel’s transformation during this period of macroeconomic uncertainty.”
Intel is another company that saw revenue decline year over year. In the most recent quarter, revenue was down -36%. The 2nd quarter projections are for $11.5-$12.5 billion in revenue, -18-25% lower than last year’s $15.32 billion. The results should be announced around July 27, 2023.
Advanced Micro Devices
AMD is projecting lower revenue in the 2nd quarter as well, down -20-24% year over year, from $6.6 billion in 2022 to $5.3 billion. The biggest weakness came from AMD’s client processor business, which saw revenue decline by -65%. Gaming revenue declined by -6%. Meanwhile, this company is trading at a very elevated share price. With net income of just $1.32 billion last year, AMD is valued at $174 billion by Wall Street investors.
Will Nvidia Stop Buying Back Its Own Stock?
Nvidia will release its earnings report tomorrow, May 24, 2023, after the markets close. The company is projecting that revenue will decline by -21.6%. This will mark the 3rd straight quarter of revenue and net income declines. However, the company is still trading at an all-time high, with an outlandish price/earnings ratio of 179.
Nvidia has been a darling on Reddit for over a year and a half. However, the resilience of the stock, and its meme stock throne may be coming to an end. Nvidia has been on an aggressive stock buyback spree. Between May 23, 2022 and January 29, 2023. Nvidia repurchased $17.12 billion of their own stock. After that flurry of shopping, they are left with only $7.23 billion authorized to repurchase stock through the end of 2023, unless the board authorizes more. With revenues down by -21% percent and net income down by -53% in the first quarter of this year, the company may be lucky to hang onto their modest annual dividend of $0.16. It’s unlikely they’re going to be able to authorize more share repurchases, unless the economy and revenue rally unexpectedly.
Should a company that earns less than $5 billion a year in net income be worth $763 billion?
ChatGPT is an OpenAI project that made headlines in November – with not all of them being good. Though the AI chatbot can write term papers for students, it can also have a rather cavalier attitude about outrageously inaccurate information. These “hallucinations” have also been racist, misogynistic and misguided.
The valuation of OpenAI is about $29 billion. Elon Musk was a board member, and Microsoft has invested $19 billion in the nonprofit/for-profit hybrid endeavor (according to Wikipedia).
What About an AI ETF?
Investing in individual companies that are offering artificial intelligence could prove to be a problem. Many of the stocks are still very expensive. Most of the companies are losing revenue and net income, and burning through cash, at a time when borrowing is cost-prohibitive. On the other hand, artificial intelligence is here to stay. It’s become embedded and essential in so many of our products, from gaming, to smart phones, automobiles, marketing, law-enforcement, data centers and beyond. The Artificial Intelligence ETF offered by iShares, symbol IRBO, is currently trading in the range of $30 a share. It hit its high of 51 in February 2021.
If we invested in IRBO previously, chances are that the slice has gotten smaller, as the share price plunged. (This is why rebalancing is so important. If your slice becomes two, sell one high!) Rather than just fill up the slice now to be fully invested, with a recession on the horizon and continued weakness in AI projected, a better strategy might be dollar cost averaging. Basically, whatever the amount is that you would have in your slice, divide that by 12 and do a monthly purchase, or divide it by three and do a quarterly purchase. That way, if the value of the ETF weekends, you’re are buying more at a lower price, rather than just watching your investment go down. If you’d like to add a slice of artificial intelligence to your diversified plan, the same strategy might be a good idea. Take it slow and easy.
AI is here to stay. Dividends, however can be here today and gone tomorrow, such as we saw with Intel in February 2023. Share prices can plunge as well, as we saw in the pandemic recession, when most of the AI companies dropped to prices that are half or more below where the shares are trading today.
Nobody is predicting the 2023 recession to be as terrible as the pandemic, due to a tight labor market, and continued consumer spending. However, we’re taking a cautious approach, nonetheless, and overweighting 20% additional safe in our nest egg pie chart strategy.
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