AI Market Update: Q3 2024 in Review

AI powerhouses lay out future plans

As AI continues to gain traction, partnerships are emerging as a way for companies to keep moving.

Heading into Q3, NVIDIA CEO Jensen Huang laid out the company's strategy to maintain its dominant position, saying it will focus on expanding partnerships with computer makers and cloud providers.

The importance of strategic partnerships has been further underscored by the success of other industry giants. Microsoft’s success in the AI boom — and certainly its performance in Q3 — can be partially attributed to its business relationships, particularly its early partnership with OpenAI.

Likewise, IBM’s (NYSE:IBM) strategic cultivation of affiliations and software offerings, evidenced by its growing AI book of business, fueled a 4.3 percent increase in its share price in July and a 2.2 percent increase in September.

Apple, which is known for its closed ecosystem, has pursued fewer partnerships than its peers, potentially limiting its future growth in the AI sector. However, the company's recent partnership with OpenAI, geared at integrating ChatGPT into the newest iPhone, hints at a potential shift in its strategy.

While collaborations and other work fueled success for many AI players in Q3, Intel (NASDAQ:INTC) faced significant headwinds, despite its history as a leader in the tech industry. The company lowered its Q3 revenue forecast and announced a 15 percent labor cut alongside suspended dividend payments to fund its chip-making efforts.

Investors sent its share price down 31.74 percent between August 1 and August 5 in response. Intel lost even more ground a month later, when its advanced silicon wafer manufacturing process, Intel 18A, failed chip-making tests conducted by Broadcom. As of mid-October, the company was down about 50 percent year-to-date.

Intel CEO Pat Gelsinger presented investors with a plan to improve the company’s financial situation in September, including plans to establish its Foundry business as an independent subsidiary and a new partnership with Amazon Web Services to produce AI fabric chips using Intel 18A. The company has also reportedly been approached with acquisition offers from Qualcomm and Apollo Global Management, although no deal has been confirmed.

Will AI be profitable in the long term?

As mentioned, while some AI companies thrived during the third quarter, concerns persist among investors about the sector's long-term profitability. A prime example of this dynamic emerged just one day after Taiwan Semiconductor Manufacturing Company (NYSE:TSM) posted its results for the second quarter on July 18.

A tech selloff ensued as investors, perhaps motivated by profit taking ahead of an anticipated interest rate cut, rotated out of mega-cap tech stocks and into small-caps and other sectors.

This selloff, while potentially driven by short-term strategies, demonstrated how sensitive the AI sector remains to external factors and broader market trends. “We're concerned about the plunges of the Nasdaq and chip stocks. It's not just a short-term thing, which we see could consolidate downwards for the next two to three months,” Allen Huang, vice president at Taipei's Mega International Investment Services, told Reuters at the time.

An August 5 rout that wiped out about US$1 trillion in market capitalization from tech’s mega-cap companies also underscored the AI sector’s sensitivity to macroeconomic events.

However, as Fortune's Geoff Colvin later pointed out, “most of the major names in the chip-manufacturing industry (not companies like NVIDIA that design chips but don’t make them) defied the panic and rose.”

This is not to say that chip stocks are immune from external market risks. The potential for product delays and supply shortages introduces another layer of complexity for investors assessing the long-term viability of AI.

Reports of potential design flaws in NVIDIA's Blackwell chip series surfaced in early August, raising concerns about the delays that could impact major companies like Google, Meta (NASDAQ:META) and Microsoft. All three of these companies have heavily invested in NVIDIA to help build out their AI infrastructure.

Tech companies are allocating a significant portion of their AI spending to data center construction. These buildouts, and indeed the sheer amount of energy AI consumes, have drawn criticism from environmental groups.

Even tech companies have been vocal about the need for an energy breakthrough to power the AI buildout, reigniting talks of using nuclear energy. To that end, in September Microsoft signed a 20 year power purchase agreement with Constellation Energy (NASDAQ:CEG) to revive Three Mile Island (TMI) Unit 1.

With that in mind, some analysts have suggested that overlooked utilites stocks might be a good alternative investment, offering a less volatile way for investors to gain exposure to the AI boom.

As Fortune's Leo Schwartz said in August, "AI is the new gold, but you can't mine it without energy. And that could offer an edge to retail investors eager to buy into the trend.”