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AI Market Update: Q2 2024 in Review
Jul. 16, 2024 01:30PM PST
AI has taken the world — and the stock market — by storm. Read on to find out about key developments that took place in the sector in Q2.
Nicholas Cappello / Unsplash
The artificial intelligence (AI) industry has experienced both remarkable growth and turbulence in Q2.
Events such as a tech selloff on April 19, triggered by stubbornly high inflation data and the US Federal Reserve's reluctance to lower interest rates, sunk the S&P 500 (INDEXSP:INX) below 5,000 for the first time since February, highlighting the influence the sector has on the overall economy.
Goldman Sachs' (NYSE:GS) prime brokerage report found that the group of companies leading the AI revolution, known as the Magnificent 7, accounted for 20.7 percent of hedge fund net exposure to US stocks following Nvidia’s Q1 results on May 22.
Despite setbacks, investor enthusiasm for the potential of AI technology has remained strong. Following the mid-April decline, major indexes trended steadily upward for the remainder of the quarter, reaching record-breaking closes the week ending on June 14. Further, Crunchbase data showed that AI startup funding more than doubled in Q2, indicating a strong appetite for innovation and a belief in the transformative potential of AI technology.
However, the potential for AI monetization remains unclear and requires further exploration. Furthermore, fears of overconcentration in the semiconductor industry were compounded after an earthquake struck Taiwan at the start of the quarter, causing supply chain interruptions as Taiwan Semiconductor Manufacturing Corporation (TSMC) (NYSE:TSM), the primary chip supplier for AI-focused tech companies, was forced to halt operations. Micron Technology (NASDAQ:MU) said the earthquake would hurt the calendar quarter of its DRAM supply as its four Taiwanese locations were also affected.
Gary Marcus, a prominent AI researcher, expressed concerns about the potential burst of the generative AI bubble in an article published just days before the disaster. He cited issues such as lack of profitability, security concerns and overconcentration in the semiconductor industry as potential catalysts.
Fueling innovation: Financing and investment in the AI sector
The AI startup landscape witnessed a surge in fundraising activities in Q2.
In early April, Reuters announced Elon Musk’s efforts to raise US$3 billion in a funding round that would have brought his startup xAI’s total valuation to US$18 billion. The story was unconfirmed at the time; however, a US$6 billion Series B funding round was announced on xAI’s website a month later, after which the company was valued at US$24 billion.
Meanwhile, Perplexity, an AI-powered search engine that could one day rival Google, held a US$62.7 million funding round that brought its valuation to US$1 billion on April 23. At the same time, the company launched Enterprise Pro, a solution designed for organizations looking to increase their productivity.
Additionally, major tech companies pursued partnerships and investments in promising AI startups, including OpenAI, the company behind ChatGPT. In April, OpenAI raised $300 million in funding and announced a collaboration with Reddit (NYSE:RDDT), providing the platform access to its AI technology in exchange for Reddit's content.
Adobe (NASDAQ:ADBE) also announced its intention to collaborate with OpenAI and other startups, such as Runway and Pika Labs, aiming to bring generative AI capabilities to Adobe Premiere Pro. Similarly, Apple's (NASDAQ:AAPL) acquisition of Datakalab was reportedly struck to enhance its product line with on-device generative AI. AI features were revealed at its World Wide Developers Conference event in June, where Apple also officially announced its partnership with OpenAI to integrate ChatGPT within iOS, iPadOS and macOS.
Prominent AI hardware provider NVIDIA (NASDAQ:NVDA) partnered with Alphabet (NASDAQ:GOOGL) to offer up to US$350,000 in Google Cloud credits to startups in NVIDIA's Inception program, a virtual incubator program designed to support and nurture AI startups.
Governments also provided various incentives to promote the development and growth of the AI industry. TSMC received a US$6.6 billion subsidy from the Commerce Department to build a production facility in Phoenix, while Micron was granted US$6.1 billion in chip grants to build factories in New York and Idaho. Intel’s (NASDAQ:INTC) US$28 billion chip factory, Ohio One, which could potentially be the world’s largest chip factory, also received government funding.
In addition, the Canadian government has shown commitment to reinforcing the country’s AI sector, with Prime Minister Justin Trudeau announcing a C$2.4 billion investment package from Budget 2024.
Addressing Challenges in the AI Industry: Managing Investor Expectations, Quarterly Results, ROI, and Data Center Expansion
With billions of dollars at stake, the recent unveiling of AI products by tech giants has had a significant impact on their quarterly results. OpenAI's GPT-4, Google's AI-powered Chromebooks Plus, Apple's AI-powered iPad and Microsoft's (NASDAQ:MSFT) Copilot+ PCs have set the stage for an AI-driven revolution in consumer technology.
As an example, Dell Technologies' (NYSE:DELL) financial results for its first fiscal quarter of 2025 were objectively solid, with 6 percent revenue growth compared to last year and an increase in AI-optimized server orders and shipments. However, despite these positive results, Dell's share price fell by over 15 percent in after-hours trading, with the decline attributed to the fact that investors had expected even stronger growth from the company.
AI-related revenue bolstered Amazon (NASDAQ:AMZN) and Broadcom’s (NASDAQ:AVGO) quarterly results, with Amazon shares hitting a new record high of US$189.05 on April 11 after its Q1 earnings showed a 235 percent rise in net income year-on-year. This marked a significant milestone for the company at the time, and its share price continued to climb – as of July 16, it is trading at US$193.02.
Broadcom’s results for its second fiscal quarter of 2024 also showed a surge of 280 percent in AI-related revenue, and the company announced that a 10-for-1 stock split would take place on July 15.
The volatility of AI stocks was on full display toward the end of April with the industry’s major players experiencing significant swings in their share prices.
NVIDIA and Super Micro Computer (NASDAQ:SMCI) led a tech selloff on April 19 when Super Micro failed to deliver a positive pre-announcement of its Q3 results. NVIDIA, a strategic collaborator of Super Micro, saw its share price fall in tandem below its 50-day moving average, and the company experienced its steepest decline since March 2020.
Days later, Super Micro, which had joined the S&P 500 only one month prior, plummeted 23 percent, leading analysts to speculate whether AI’s run could be showing signs of winding down. The company’s results added fuel to these worries when it missed revenue estimates for Q3 and saw its shares drop 14 percent in after-hours trading.
Despite the earlier challenges, NVIDIA had its best weekly performance in almost a year during the week that ended on April 26, when its share price rallied 15 percent on the heels of quarterly reports released by Meta (NASDAQ:META), Microsoft and Alphabet. All three companies announced plans to spend more on AI in the coming year; however, only Meta — whose Q1 results were released in close succession to Llama 3 and the addition of multimodal AI to its Ray-Ban Smart Glasses — saw a drop in share price due to weaker Q2 revenue guidance coupled with higher expenditure. The stock’s price fell by 14.74 percent.
Alphabet announced its first dividend and a US$70 billion stock buyback upon the release of its Q1 results, bringing its share price up by 10 percent and driving the market cap above US$2 trillion, its highest valuation since November 2021.
Apple and Microsoft also reported strong financial performances. Apple's Q2 results included a record-breaking US$110 billion share buyback program, demonstrating the company's commitment to shareholder value. Meanwhile, Microsoft's Q3 results revealed a robust 17 percent year-over-year revenue increase.
NVIDIA's upward trend continued as it announced Q1 2024 results and a June 7 stock split — potentially making it eligible for a spot on the Dow Jones Industrial Average — on May 22. Subsequently, NVIDIA surpassed Apple as the second most valuable company on June 5, achieving a market cap of US$3.02 trillion.
Rising Challenges: Chip Shortage, Geopolitical Tensions, and Power Consumption
The rapid growth of AI and the increasing demand for data-intensive applications have led to a surge in data center construction and a significant increase in electrical utility demand. Rene Haas, CEO of Arm Holdings (NASDAQ:ARM), told Bloomberg that AI computing's energy consumption is projected to surpass the electrical use of India by 2030.
With those dynamics in mind, Amazon and Alphabet have announced significant investments in data center infrastructure, with Amazon investing US$11 billion in Indiana and Alphabet planning a US$3 billion investment for data centers in Indiana and Virginia.
These data centers require vast amounts of energy to power their servers, cooling systems and other infrastructure, contributing to the overall strain on electrical grids. As AI continues to advance and more data-driven technologies emerge, the demand for electrical power by data centers is expected to further escalate, with South Korean electrical equipment manufacturers such as Hyundai (KRX:005380), Hyosung (KRX:004800) and LS Electric (KRX:010120) witnessing significant gains in their share prices as a result.
However, the demand poses challenges to energy providers and necessitates innovative solutions for sustainable power generation and distribution, prompting the establishment of the Federal AI Safety and Security Board. The board is comprised of prominent figures like NVIDIA's Jensen Huang and OpenAI’s Sam Altman, who will help guide the responsible development and deployment of AI technologies, including addressing the associated challenges of increased electricity consumption.
The subsequent surge in power consumption has brought the energy efficiency of computer chips into sharper focus. Google, for instance, unveiled Axion, an Arm-based data center processor, aimed at improving energy efficiency in data centers, along with a new version of its own AI chip.
The push for efficiency extends to the manufacturing process as well. TSMC is planning a new generation of technology called A16, which is expected during the second half of 2026. The company says the technology will allow it to produce chips without using ASML’s (NASDAQ:ASML) High NA EUV machine, which can reportedly build powerful chips more efficiently.
TSMC also had a good quarter, reporting its fastest monthly revenue growth since 2022 in March. The chipmaker's Q1 results, released on April 18, beat market expectations in quarterly net profit by 9 percent, with growth expected to continue as demand for chips increases.
Looking ahead
Overall, the second quarter of 2024 has been marked by notable developments in the technology sector. While companies reported strong financial results, the industry faces antitrust lawsuits across various jurisdictions. The outcomes of these legal proceedings and the potential impact on the competitive landscape remain to be seen, emphasizing the importance of monitoring the evolving regulatory environment in the coming months.
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Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
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