Why Advanced Micro Devices, C3.ai, Arm Holdings and other artificial intelligence (AI) stocks tumbled on Tuesday

It is clear that several forces have pushed the market higher over the past few years. Recent developments in artificial intelligence (AI) helped kickstart last year’s bull market, with the technology unleashing a wave of productivity gains. Market watchers also want to know when the Federal Reserve will start cutting interest rates and how quickly they will do so.

Against this backdrop, several AI-related stocks fell on Tuesday. 1:16 PM (ET) Semiconductor specialist advanced micro devices (AMD -3.12%) AI software maker down 3.7% C3.ai (AI -3.03%) Down 2.8%, chip designer Arm Holdings (eight -2.04%) down 1.8%, the chipmaker said. micron technology (M.U. -1.58%) Also down 1.8%

After examining all the usual suspects – regulatory filings, financial reports, analyst price target changes – we found no company-specific news to explain the decline, suggesting investors are focused on broader economic developments. .

Image source: Getty Images.

Interest rate cut in June? Not so fast

Market observers were eager for the Federal Reserve to start lowering interest rates. This will be a key indicator that US inflation is finally under control. But Federal Reserve Chairman Jerome Powell threw cold water on investors’ hopes Friday, suggesting the central bank plans to cut the federal funds rate again this year but is in no rush to start doing so. In a speech at the San Francisco Federal Reserve, Powell said the Fed was looking for “better indicators of inflation” and did not want to hastily change monetary policy before inflation was brought under control.

On Tuesday morning, the Institute for Supply Management (ISM) reported the ISM Manufacturing Index at 50.3, up from 47.8 and higher than the 48.1 level expected by economists. A reading above 50 signals growth in the manufacturing sector, showing inflation is not yet fully under control and adding further indications that the Federal Reserve may not be able to cut interest rates as quickly as market observers had hoped. This suggests that the possibility of an interest rate cut in June may gradually decrease.

That view was reinforced by resilient jobs data released Tuesday by the Bureau of Labor Statistics. The number of hirings was almost unchanged at 8.8 million, and the number of hirings and turnovers were also almost unchanged at 5.8 million and 5.6 million, respectively.

Robust economic growth, as evidenced by strong manufacturing and employment data, suggests that inflation is moderating but not yet under control.

Why is it important?

So what does this have to do with our four AI stocks? Simply put, if it costs more to borrow money, companies will be less likely to adopt game-changing and expensive technologies like generative AI. When funds are tight, managers are content to postpone that type of spending until borrowing costs are lower.

• AMD provides graphics processing units (GPUs) that facilitate the training and use of AI models. These systems can cost tens of thousands of dollars or more per chip, so many buyers will have to consider the cost of borrowing.
• C3.ai provides businesses with an off-the-shelf software model that they may be reluctant to adopt when cash is tight.
• Arm Holdings creates the blueprints that form the basis for many widely used semiconductors and receives licensing fees and royalties for use of its designs. Rising inflation and slower technology adoption could reduce profits.
• Micron Technology makes flash memory and storage processors, which are key components of AI processing, so it is also affected by interest rate increases.

you get what you pay for

In terms of valuation, this group of stocks is a mixed bag, but none of them are particularly cheap based on the most widely used metrics. Arm Holdings, AMD, C3.ai, and Micron are currently trading forward at 27x, 9x, 9x, and 4x, respectively. However, when measured using the forward price/growth ratio (PEG), which takes into account the company’s current growth rate, Arm Holdings, Micron, and AMD fall below 1, which is the threshold for undervalued stocks. . C3.ai is the riskiest of the four as it has not yet generated revenue.

Since AI is still in its infancy, there is a lot of upside ahead. But investing in AI-related companies is not for the faint-hearted. Those considering this should carefully assess their risk tolerance and ability to withstand the significant volatility that will continue in the future.