Without question, the market has developed an insatiable appetite for artificial intelligence (AI) technology and for the companies steering this new frontier. Viewed as a promising future, the AI profit potential is staggering, with the generative AI market currently experiencing a 42% growth rate and the potential to reach $1.3 trillion by 2032, according to Bloomberg Intelligence estimates.
A significant portion of this revenue is expected to come from the demand for infrastructure required to train AI models, estimated at $247 billion by 2032. As the competition to dominate AI technology intensifies, it's not hard to spot the clear winners. Investor have flocked to the likes of Microsoft (MSFT) (up 11%) and 62% over the past year and Advanced Micro Devices (AMD) which as seen its stock more than double (up 109%) in twelve months. Of course, there's Nvidia (NVDA), the reigning king of AI, which has already skyrocketed 77% year to date, while returning 262% over the past year.
Driven by consumer-focused AI tools such as ChatGPT and Google's (GOOG, GOOGL) Gemini, among others, AI continues to not only dominate headlines, but also corporate IT budgets. The question is, for how long? The term “AI bubble” is now permeating across Wall Street with some analysts, including Citigroup’s Christopher Danely, raising the alarm about valuations and sustainability.
"We would note that these bubbles can last a year or longer, similar to what happened in 1999 with the tech bubble," Danely wrote in an investor note, adding the bubble could last into 2025 as long as estimates keep rising. "Tech stocks will not go straight up and instead go through digestion periods as more data points are picked up across the supply chain and IT spending landscape which is a healthy process."
The addressable market for AI continues to expand. Factoring the AI benefits, namely enabling computers to learn and problem-solve like humans, employing advanced forms of computer processing, including machine learning and neural networks, the addressable market could reach $2 trillion over the next decade, according to Gartner. And this does not included the addressable market of semiconductors which has already more than doubled to $90 billion in 2024, up from $40 billion last year.
Not only is the market for semiconductors expected to continue to rise, according to Bank of America, but also over the next five years, the for AI accelerators could range between $250 billion and $500 billion, rising from less than $250 billion. Meanwhile, there's the market for AI-assisted digital ads, which is projected to generate $192 billion in annual revenue by 2032, and AI servers potentially reaching $134 billion. And the reference to AI servers, notably the chips in those servers, is where Nvidia makes its money.
Despite these strong projections, there was noticeable profit-taking occurring in Nvidia stock last week, which Wedbush Securities analyst Dan Ives thought was unjustified. "Lets be clear: we have covered tech on the Street since the late 90's and this is not a bubble but instead the start of a 4th Industrial Revolution now on the doorstep that will have major growth ramifications for the tech sector led by the software/use case phase in motion," Ives wrote in a research note earlier this week, referencing the Nvidia selloff.
Ives added more context, reminding investors that ”tech stocks will not go straight up and instead go through digestion periods as more data points are picked up across the supply chain and IT spending landscape which is a healthy process.”
I think that’s the best way to look at it when assessing this burgeoning AI frontier. Competition will be fierce, and so will the drive to innovate which will present attractive risk-reward growth opportunities in 2024 and beyond.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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