Investor Shift: From Magnificent AI Stocks to AI Laggards

Tech Investors Shift Focus from Overvalued AI Stocks to Undervalued Laggards

Investors are redirecting their attention from the overvalued "Magnificent Seven" AI stocks, such as Nvidia and Microsoft, to the undervalued "AI laggards," including Intel, AMD, and IBM. This adjustment stems from concerns about stretched valuations and slowing growth in the former. The move has also positioned smaller tech players, like F5 Inc. and Keysight Technologies Inc., as beneficiaries due to their strong fundamentals and overlooked potential.

The shift is partially influenced by apprehensions surrounding potential trade constraints on advanced chip technology to China, impacting chip stocks. Analysts from Melius Research and Baird anticipate that these undervalued stocks may witness a performance "catch-up," resembling trends observed in 2023. Notably, Citigroup has advocated for profit-taking from high-flying AI stocks and redistributing investments across a broader array of AI equities.

Anticipated slow earnings growth for the Magnificent Seven is making the laggards more appealing. The significance of IBM's upcoming second-quarter results looms large, as they could serve as a barometer for the continuation of this trend. The recent outperformance of small-cap tech stocks further indicates a sweeping market shift away from megacaps, possibly directed towards undervalued smaller entities.

Key Takeaways

• Investors are gravitating from high-valued AI stocks like Nvidia and Microsoft towards undervalued "AI laggards" such as Intel, AMD, and IBM.
• Smaller tech companies like F5 Inc. and Keysight Technologies are gaining traction due to their robust fundamentals and lower valuations.
• The shift in focus is partly driven by potential U.S. trade restrictions on advanced chip technology to China, impacting chip stocks.
• Experts foresee a "catch-up" trend for tech sectors with lower expectations, mirroring underdog performances in the latter half of 2023.
• Small-cap tech stocks have recently outperformed large-caps, indicating a market rotation towards potentially undervalued names.

Analysis

The rearrangement of investments from overvalued AI giants, like Nvidia and Microsoft, to undervalued "AI laggards" such as Intel and IBM, triggered by trade restrictions and decelerating growth, resonates throughout both sectors. While short-term gains favor laggards and small-cap tech companies, potentially boosting their market performance, the long-term impact could stabilize the AI market, lessening volatility and fostering innovation across a broad tech spectrum.

Did You Know?

• AI Laggards:
• This term refers to underperforming companies in the AI sector or those with lower market valuations compared to leading AI firms. Intel, AMD, and IBM are considered AI laggards due to their lower valuations and growth potential relative to high-flying AI stocks like Nvidia and Microsoft.
• Catch-up Trade:
• It denotes an investment strategy where focus shifts from overvalued stocks to undervalued ones with potential for future outperformance. Analysts anticipate a catch-up trade for undervalued tech sectors, akin to trends observed in 2023.
• Small-cap Tech Stocks:
• These are technology companies with relatively small market capitalizations. Although they are often perceived as riskier than large-cap tech companies, they offer higher growth potential. The recent outperformance of small-cap tech stocks suggests a market rotation towards potentially undervalued smaller entities.