Surfing the AI wave was fun for all technology companies, but that was only in 2023. At a time when it is exactly just about a year since Nvidia’s blockbuster quarterly earnings kickstarted the global AI rally in the last week of May 2023, fissures are now emerging between the haves and have-nots in the AI theme.

Divergent trend

Unlike 2023, there is a divergent trend between companies continuing to benefit from the theme and those that are not. This is reflected in the sagging YTD stock performance of many technology companies in 2024, while the companies that are benefiting from the theme continue to outperform.

This was undeniably brought to the fore last week when shares of SaaS giant Salesforce tanked 20 per cent last Thursday, its worst single-day performance in two decades. Salesforce’s weak share performance followed a poor earnings report from another prominent SaaS player, Workday, whose shares plunged 15 per cent the week before. And to think of it, these negative reactions were triggered by marginal misses in guidance versus expectations. This underscores to what extent AI expectations are loaded up in stock prices. Even slight missses are punished when it comes to AI linked technology stocks in the US. 

Indian IT companies like TCS, Infosys, WIpro, HCL Technologies and others that also benefited from the AI buzz in 2023 as valuation multiples expanded despite weak core results, are now seeing valuations compress and stock performances sag. If AI related revenues do not start reflecting in their financials, their shares too face the risk of more severe negative reactions like their US counterparts..

As compared to these, Nvidia has returned over 100 per cent this year, on top of a stellar 238 per cent return in 2023. Meta Platforms and Alphabet have continued with their onward march in 2024, while Tesla has moved in the reverse gear.

What gives?

Story to numbers

When sentiment is positive during early stages of any disruptive theme, stories take precedence over numbers. However, as this phase passes, numbers begin to matter. Calendar 2024 is shaping up to be the year when numbers start to matter for the AI theme.

While most prominent large-cap companies in technology have a solid core business, multiples had expanded in anticipation of AI boosting long-term growth for most.

But as core businesses for many players are impacted by reduced tech spending, and their emerging AI capabilities are not reflected adequately in numbers, investor patience appears to be wearing out.

This is becoming the case now even for the winners. Take the case of Dell Technologies. Its shares had a record run last year and this year as well. Dell’s newfound investor love was thanks to its partnership with Nvidia, with Dell providing the IT infrastructure solutions to build ‘AI Factories’ or what are called the next-generation data centres. Dell’s shares cracked 18 per cent on Friday when its results indicated that AI related server revenue growth is not translating into bottomline at all, although it remains a solid performer YTD.

The chart above covers most of the prominent technology companies, it also includes relatively smaller or niche players such as Freshworks, UiPath and C3.ai that are attempting to make their mark in the AI economy. Large or small company, numbers matter now., in the absence of which the 2024 share performance is sagging.

Either a solid core business or demonstration of a solid AI capability is required to keep the momentum going from here.

This is what has worked in favour of companies that have continued to do well, though they are not similar. While Nvidia is one of the few where the core business is driven by AI, in the case of companies like AMD, ARM or Micron Technologies, or for that matter Amazon or Meta Platforms, their core business is not AI. But they have managed to maintain the momentum in existing business or in demonstrating convincing AI capabilities.

Still early days, but this is the story so far. As the AI theme evolves and disruptions magnify, there will be disproportionate gainers and disproportionate losers. Indian investors betting on Indian IT services stocks to benefit from the theme must take cognisance of this.

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