Nvidia's time in the limelight of the artificial-intelligence trade might be coming to an end. Memory-product companies are the new AI darlings but they could be a big trap for unwary investors.
Nvidia's announcements about its new AI chips at CES, formerly known as the Consumer Electronics Show, made little impact on its stock. So what to do when the favorite 'picks and shovels' trade -- selling the hardware to power the AI gold rush -- is exhausted? Maybe move onto the handles and blades -- for AI that means switching focus from Nvidia's chips to more specialized components. Nvidia CEO Jensen Huang's comments on the need for memory products helped Sandisk, Western Digital and Seagate Technology soar.
To an extent that makes sense. Nvidia's dominance is being challenged by Google, but there's no question about the need for memory. Counterpoint Research forecasts memory prices will surge 40%-50% in the current quarter, driven by demand for AI and server capacity. South Korea's Samsung Electronics is expected to report Thursday that quarterly profit more than tripled from the prior year, due to its flagship memory-chip segment.
But stock moves like Sandisk's 27% gain on Tuesday suggest retail traders moving in a herd. The memory-chip market is a cyclical one, going from boom to bust on swings between shortages and oversupply, and not all companies have equally good products. Analysts at Jefferies warn bulls on Sandisk have "no idea" what market share Chinese competitor Yangtze Memory Technologies has as it ramps up output. Traders rushing into the sector will have to time their exit wisely to lock in gains.
In the meantime, higher memory prices will mean costly smartphones and laptops -- bad news for the likes of Apple and Dell Technologies. If the squeeze does last, it could eventually even crimp the margins of AI hardware companies like Nvidia.
"In a gold rush, sell shovels" is generally good advice but like anything it can be taken too far. Investors might want to sit out the latest hot AI trade.
-- Adam Clark