Our theme of Internet Infrastructure Stocks – which includes a diverse set of companies that sell hardware and software that underpin the Internet – has fared well this year, rising by a solid 40% year-to-date, outperforming the Nasdaq-100 which gained about 34% over the same period. This follows a tough 2022, which saw the theme decline by 39% over the year.
We expected limited expenditure on data center technologies this year, primarily due to major public cloud providers optimizing their substantial infrastructure investments made during the Covid-19 pandemic, and facing the prospect of an economic slowdown. However, the industry appears to be regaining momentum driven in part by excitement surrounding generative artificial intelligence, a technology that utilizes machine learning models to generate innovative and imaginative content and results. These AI workloads are computationally very heavy and are driving demand for accelerated computing chips and GPUs sold by the likes of Nvidia and AMD. Nvidia, for example, saw sales more than double over its most recently reported quarter driven by higher demand for its A100 and H100 chips focused on accelerated computing. Moreover, memory manufacturers such as Micron are also expected to see demand rise for faster, higher-density chips. Apart from this, the supply chain snarls, which proved to be a constraint for much of the technology industry through 2021 and 2022, are also easing, and this could potentially help revenue growth for companies such as Cisco, who saw their hardware businesses weighed down in recent years.
Micron stock had a Sharpe Ratio of 0.5 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
So what’s the outlook like for the theme? While the structural shift toward greater digitization will drive the theme in the long run, valuations are also a bit high, making the risk-to-reward tradeoff a bit less attractive for the near term. Within our theme, Nvidia stock has been the strongest performer, rising by about 2x year-to-date, as the company sees sales of its graphics processing units surge, driven by demand from the AI space. Micron stock has also fared reasonably well, rising by about 36% year-to-date. On the other side, Juniper Networks
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