Morgan Stanley’s 15 Ways to Play AI report, put out by their global technology research team, is a reminder that the next stage of the artificial intelligence (AI) revolution may happen in our pockets and purses on mobile devices.
The current, rapid proliferation of AI use is done through the cloud. Questions are asked in a web browser, the computations and analysis is done in large data centers, then sent back to the browser. The next stage will be dominated by Edge AI, where computations are done locally, in the user’s hand or on their laptop.
Morgan Stanley identifies Edge AI as the subtheme with the highest expected profit growth for 2024. Yet the related stocks are, on average, among the cheapest AI-related companies on the market.
An upturn in the smartphone sales cycle – the analysts have raised sales targets for 2024 and 2025 after the end of an inventory glut – will boost the implementation of mobile AI. Manufacturers of the equipment that functions as the central processing unit of smartphones (these are known as SoC or System on a Chip) are already partnering with AI developers to provide new mobile functionality - Qualcomm is one such example. More smartphone memory will also be required, boosting earnings growth for related manufacturers.
Morgan Stanley believes AI will generate new features on smartphones and PCs. These include enhanced photography, desktop-level gaming on smartphones, and AI virtual companions. Stable diffusion – the creation of images from textual descriptions – will also be possible.
The analysts have identified several primary beneficiaries of the growth in Edge AI. Their top ideas are SK Hynix (for memory) , MediaTek (SoC), Qualcomm (SoC), Samsung Electro-Mechanics (smartphone supply chain), Will Semi (supply chain), Goodix, Apple, Xiaomi (Android equipment), Transsion (Android), Lenovo, and Asustek.
On a personal note, I am using existing AI options more and more. Anytime I think “I need to look that up’, or to summarize a long research report, I go immediately to Microsoft’s Copilot app. The answers need to be re-checked, but they are immediate, comprehensive, and most often accurate. I am extremely interested in what developers can dream up for mobile devices.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Super Micro Computer (SMCI-Q) This company, which joined the S&P 500 on Monday, enjoys a rare advantage among server makers that are trying to tap the generative AI boom - close ties with Nvidia that help it launch products faster than rivals. That has helped turn the company into a key supplier of servers essential for generative AI apps and sent Super Micro’s shares up 289 per cent so far this year.
The Rundown
A timely reminder of how long and hard U.S. stocks can fall
The S&P 500 stock index was up 8.8 per cent for the year through mid-March, right in line with the 29 per cent return last year and the five-year average annual return of 13.4 per cent. Meanwhile, the S&P/TSX composite index was up 4.7 per cent year to date, last year’s gain was 9.2 per cent and the annualized five-year return was 9.3 per cent. So should we all just shift our investments to the U.S.? Not so fast. Rob Carrick has some important historical context.
As bonds continue struggle to regain footing, here’s where investors could look
The benchmark iShares Core Canadian Universe Bond Index ETF (XBB-T), which tracks the full spectrum of Canadian bonds, fell a record 11.78 per cent in 2022. The ETF staged a modest recovery in 2023, gaining 6.61 per cent. But it’s back to its losing ways so far this year, down 2 per cent. Gordon Pape has some suggestions on bond ETFs to consider as the outlook turns a bit hazy on the direction interest rates may take next.
Also see: The 2024 Globe and Mail ETF Buyers Guide, Part Two - Canadian bond funds
The dark side of Bay Street’s private debt funds: Investors often fly blind, and billions of dollars are now trapped
Canadians are often flying blind when they invest in private debt funds, and when things go bad, there aren’t many safeguards to protect them. Reporter TIm Kiladze does a deep dive into the topic.
Some companies can be difficult to understand. Short-sellers love them
Are complex companies easy targets for short-sellers? It’s certainly looking that way based on a couple of recent cases, where investors who profit from falling share prices have poked holes in seemingly bulletproof companies that can be painfully difficult to defend. The key for investors, says David Berman, is to know that selling into a downturn for a complex stock targetted by a short seller may be a bad idea.
Investors need to get used to an age of bubbles. Here’s how
At times like this, the financial discourse inevitably circles back to the same question: Is this a bubble? While the answer is probably yes, it almost doesn’t matter anymore. We are living in the age of bubbles, and all an investor can do is learn to live within them. That’s because, as TIm Shufelt tells us, avoiding market bubbles would mean missing out on some of the market’s greatest runs.
Fracturing ‘Magnificent Seven’ trade puts spotlight on megacap valuations
The so-called “Magnificent Seven” are collectively trading at an average of 33 times their expected earnings for the next 12 months, up from 26 at the end of 2022. That compares with a price-to-earnings ratio of about 21 for the benchmark S&P 500 index, which has risen over 7 per cent this year. Investors last year were happy to pay up for the megacaps, given the companies’ solid balance sheets and dominant positions atop their industries. But as Reuters reports, they have been more discriminating this year, punishing the shares of Tesla and Apple when their outlooks turned murky while fueling dizzying gains in Nvidia.
Bond market sees inflation as a wild card for easing timetable at Fed meeting
While bond investors expect the U.S. Federal Reserve to keep rates unchanged at its policy announcement on Wednesday, the market reaction could hinge on what Fed officials indicate about stubborn inflation and if their signals get more hawkish about the timing and extent of any easing this year.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Reddit’s IPO as much as five times oversubscribed, sources say
Ask Globe Investor
Question: What is your take on H&R Real Estate Investment Trust HR-UN-T)? The unit price has been extremely volatile over the past several years. It fell by more than half at the start of the COVID-19 pandemic, rebounded over the next 18 months, but since late 2021 it’s been pretty much downhill. What is going on here?
Answer: Like many REITs, H&R has been hurt by a combination of high interest rates and negative investor sentiment toward commercial real estate, particularly office and retail properties. But for investors who can be patient, H&R’s weak unit price could present an opportunity, says John Heinzl. He provides his full rationale here.
What’s up in the days ahead
Thinking about adding some bitcoin to your portfolio? You may want to hear what the Contra Guys have to say first.
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Compiled by Globe Investor Staff