Nvidia and other chip stocks surge with no sign of AI spending slowdown — for now

Nvidia's (NVDA) record close on Monday comes as AI hardware stocks continue a recent tear fueled by investor enthusiasm over surging artificial intelligence demand.

Nvidia shares are up 8% from last week, pushing the chipmaker closer to unseating 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 touting an intense need 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) have risen, too, as the companies have given separate indications of strong demand for their products thanks to the AI boom. TSMC (TSM) stock also closed at a record high Monday.

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

The upward trajectory of AI chip stocks is a positive sign for AI hardware spending that assuages Wall Street’s concerns of a near-term slowdown on investment.

"While Phase 2 stocks [i.e. AI-infrastructure related stocks such as Arm, TSMC, and SMCI] appear modestly expensive relative to history, it is possible that the demand for AI leads the mega-cap tech stocks to spend even more on AI-related capex than investors and analysts currently expect," Goldman Sachs analysts wrote in their report on Oct. 10.

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, to the benefit of AI hardware companies, led by Nvidia. As a whole, mega-cap tech stocks are set to spend $215 billion on AI capital expenditures in 2024 and $250 billion in 2025, according to Goldman Sachs.

OpenAI’s recent $6.6 billion funding round is also expected to put cash in the hands of hardware companies — namely Nvidia — as it continues evolving its AI models.

JPMorgan (JPM) analyst Harlan Sur sees revenues for the semiconductor industry growing 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 move higher in anticipation of better supply/demand in 2H24/25 and stable/rising earnings power trends in CY24/25.”

A slowdown in investment will eventually come, though. The question is when.

Whereas 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 eases.