Nvidia and other chip stocks are rising, with no signs of a slowdown in AI spending — for now

Nvidia's (NVDA) record close on Monday comes as AI hardware stocks continue their recent run higher, fueled by investor enthusiasm over rising demand for artificial intelligence.

Nvidia shares are up 8% from last week, bringing the chipmaker closer to replacing Apple (AAPL) as Wall Street's most valuable company. The stock's rally follows recent comments from CEO Jensen Huang and the chipmaker's partners announcing strong demand for its AI chips.

Other AI chip and hardware stocks Arm (ARM), Qualcomm (QCOM), Broadcom (AVGO), Super Micro Computer (SMCI), Astera Labs (ALAB) and Micron (MU) also rose, as the companies reported separately They are experiencing strong demand for their products thanks to the AI ​​boom. TSMC (TSM) shares also closed at a record high on Monday.

All told, the PHLX Semiconductor Index (^SOX) is up 4.7% over the past five days, outperforming the S&P 500 (^GSPC), which is up 3% over the same period.

The bullish trend in AI chip stocks is a positive sign for AI hardware spending, easing Wall Street's concerns about a near-term slowdown in investment.

“While Phase 2 stocks (i.e. AI infrastructure-related stocks like Arm, TSMC and SMCI) appear moderately expensive by historical standards, it is possible that demand for AI will drive mega-cap tech stocks to do so even more “The associated capital expenditures will be higher than investors and analysts currently expect,” Goldman Sachs analysts wrote in their Oct. 10 report.

Google (GOOG), Microsoft (MSFT), Amazon (AMZN) and Meta (META) have all indicated that they will continue to spend large sums on AI infrastructure through next year, giving AI hardware companies led by Nvidia, will benefit. Mega-cap tech stocks are expected to spend $215 billion on AI investments in 2024 and $250 billion in 2025, according to Goldman Sachs.

OpenAI's latest $6.6 billion funding round is also expected to put money into the hands of hardware companies – particularly Nvidia – as the company continues to develop its AI models.

Harlan Sur, an analyst at JPMorgan (JPM), expects semiconductor industry sales to rise 6% to 8% in 2024. “We remain positive on semiconductor and semiconductor equipment stocks,” he said in a recent note to investors, “as we believe stocks should continue to sustain in anticipation of better supply/demand in 2H24 /25 and stable/increasing profitability trends in the 24/25 financial year.”

However, at some point there will be a slowdown in investment. The question is when.

While AI software is typically offered on a subscription basis, hardware is a one-time sale. Analysts have warned that AI chip stocks are in a bubble that will eventually burst once Big Tech's massive spending on AI infrastructure subsides.

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In fact, the tech giants' recent earnings reports showed a growing gap between their heavy spending on artificial intelligence infrastructure and their return on capital – testing Wall Street's waning patience. Shares of Google, Microsoft and Amazon all fell in late summer after their quarterly financial reports showed billions in AI spending.

“We continue to believe that data center infrastructure spending will be high this year and possibly next,” DA Davidson analyst Gil Luria told Yahoo Finance in an email, “but that there will be a peak in capital spending at some point There will be hyperscalers in the next (calendar) year.”

Laura Bratton is a reporter for Yahoo Finance. Follow her on X @LauraBratton5.

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