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AI war on the stock market: "Microsoft beats Nvidia in risk/reward"

Published Nov 24, 2023 12:28
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Investing.com - Artificial Intelligence has hit the stock market. Nordic asset manager DNB AM looks at market leaders in AI, such as NVIDIA (NASDAQ:NVDA) and cloud giants Microsoft (NASDAQ:MSFT) (Azure), Amazon.com (NASDAQ:AMZN) (AWS) and Alphabet (NASDAQ:GOOGL) (GCP).

Anders Tandberg-Johansen, head of global technology sector research at DNB AM, believes the risk/reward ratio is better for Microsoft than for Nvidia, which may be going through its market share zenith.

"Players such as Nvidia and cloud giants Microsoft (Azure), Amazon (AWS) and Alphabet (GCP) are the main proponents of generative AI. However, long-term success will depend on new products being launched for businesses and consumers, such as Microsoft's Co-Pilot and Meta's (NASDAQ:META) new advertising tools," explains Tandberg-Johansen.

"When it comes to investments in artificial intelligence, we believe the risk/reward ratio is better for Microsoft than for Nvidia. The rise of AI has caused buyers to switch to Nvidia products in droves. Component availability may have a negative impact on high-bandwidth memory (HBM) production. In fact, we do not believe that the production rate is sustainable," he adds.

Nvidia's zenith?

As Tandberg-Johansen points out, Nvidia currently enjoys a leading position thanks to its pioneering work in AI-focused hardware development. "However, its position is not invulnerable. There is a potential downside risk if consumer demand for generative AI solutions does not meet the optimistic forecasts of the so-called "hyperscalers" (large cloud service providers that can offer enterprise-level services such as compute and storage). Nvidia is in stiff competition with Advances Micro Devices (AMD (NASDAQ:AMD)) and should also pay attention to its own hyperscaler chip designs, which are more cost-effective for specialised AI tasks. This period could well represent the zenith of Nvidia's market share," says the analyst.

"AI growth will continue to go hand-in-hand with advances in machine learning algorithms, data analytics, cloud computing and specialised hardware. The enthusiasm is already reflected in share prices: the "Magnificent Seven" are up more than 50% year-on-year. At the same time, we have seen investors sell companies with no direct connection to generative AI to fund the purchase of generative AI companies, leading to significant market disparities in this sector and opening up interesting investment opportunities," highlights Tandberg-Johansen.

Investment strategy

"In line with our contrarian approach, we have sold some of our exposure to generative AI companies that we currently consider fairly valued, such as Adobe (NASDAQ:ADBE) and CRM, to fund the acquisition of Ericsson (BS:ERICAs) and Nokia (HE:NOKIA), which are currently under pressure. Both companies have stable, high-margin IP portfolios that justify almost the entirety of their enterprise value. This means that the mobile sector, which is likely to stabilise and recover sometime next year, is currently available at a low valuation of 3-4x EBIT," says Tandberg-Johansen.

"Ericsson's (ST:ERICb) competitive situation has improved significantly over the last five years. Ericsson had an inventory problem due to a 35% drop in sales in North America as a result of the pandemic. However, we expect sales in North America to return to normal by 2024. In addition, Ericsson has restructured and signed long-term licence agreements, so-called IPR agreements, with Apple (NASDAQ:AAPL), Samsung (KS:005930) and Huawei. According to our earnings forecasts for next year, Ericsson currently trades at a P/E of around 6. Even before the news of Ericsson's recent very high depreciation was made public, we had already weighted Ericsson higher than US tech giants Alphabet and Nvidia in our DNB Technology Fund portfolio. Therefore, the recent news on Ericsson does not change our valuation," he concludes.

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AI war on the stock market: "Microsoft beats Nvidia in risk/reward"
 

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