When it comes to the future of AI, you probably won’t find anyone more bullish than me. I’m confident that AI will fundamentally reshape the global economy over the next several years. And as a result, the top AI stocks will be huge winners on Wall Street.
But even the biggest of bull markets don’t go up in straight lines.
Just consider the dot-com boom of the 1990s. During that time, Microsoft (MSFT) stock soared nearly 10,000%. But along the way, it suffered nine different pullbacks of 20% or more.
Point being: Even long-term winners suffer big short-term pullbacks.
And right now, some of the biggest long-term winners in the AI Boom are about to suffer such a pullback.
AI Chip Stocks Need a Breather
Throughout 2023 and into the start of this new year, semiconductor chip stocks have been huge winners. Companies like Nvidia (NVDA), Advanced Micro Devices (AMD), and Intel (INTC) have found themselves at the epicenter of this boom, supplying the chips necessary to build AI applications and products.
This has led to exceptional performance in AI chip stocks.
But now those stocks look very extended. The relative strength index (RSI) on the iShares Semiconductor ETF (SOXX) is now in overbought territory at 73. And at the same time, the ETF is trading at the top of its 2023/24 uptrend channel.
Technically, these stocks look ripe for pullback – on the right catalyst. And that may have just arrived last night with a weak earnings report from Intel.
The chip giant topped revenue and earnings estimates on the back of healthy AI chip demand. But management delivered very weak guidance for the first quarter, which missed Wall Street estimates by a mile.
Specifically, investors were hoping that burgeoning AI chip demand would spark massive revenue growth at Intel, from ~10% growth in Q4 to >20% growth in Q1. Instead, Intel expects to grow revenues around 10% again next quarter.
That’s not exactly the big AI-driven acceleration that Wall Street was hoping for.
And we believe this exposes a broader problem with AI chip stocks. Wall Street is expecting too much, too soon out of these companies.
The Final Word on Intel Earnings
Now, we’re confident that long-term, AI chip stocks are just fine. Major players like Nvidia, AMD, and Intel are durable winners that will rally strongly throughout the rest of 2024 – and likely the rest of the decade, too. So, if you’re a long-term investor, these are winning stocks you want in your portfolio.
But don’t be surprised if, in the short term, these stocks retreat 10% or even 20%-plus.
They’ve run too far, too fast on expectations that are just too much, too soon.
That’s why we recently took some profits off the table on a few of these stocks in our core research service, Innovation Investor. We rang the register on cumulative profits of nearly 500% across multiple AI stock positions this past week.
See; we actually think the stock market itself is going to keep pushing higher. But we expect that AI chip stocks are going to take a breather. And other stocks will start leading the rally.
We’re recommending folks initiate positions in those other stocks right now.
Find out which stocks we’re talking about.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.