The growing complexity and breadth of the technology sector is reflected in research reports dominated by a mishmash of unfamiliar acronyms that make investing in related individual stocks a frustrating experience. Thankfully, Citi analysts led by Atif Malik recently published a report helping simplify the considerable investment opportunities available in artificial intelligence (AI) infrastructure.
Citi divides AI infrastructure into three segments: computing, which includes high bandwidth memory, networking and external storage. The first segment, which includes Advanced Micro Devices (AMD-Q) but is dominated by Nvidia’s (NVDA-Q) graphics processor (GPU) chips, has seen related stocks ramping higher in a broad investor frenzy. The computing segment is likely too hot for risk-averse investors at this stage.
Things are cooler so far in the second segment: networking. Mr. Malik writes that networking is divided into switching and transceivers. Switches are situated on top of AI servers to direct information traffic and transceivers accelerate the movement of data between servers. The transceivers facilitate AI clustering, “a machine learning (ML) process to organize datasets with similar attributes into subgroups. These AI clusters are projected to drive an important need for both bandwidth and scale across compute layers including networking,” writes Mr. Malik.
Nvidia has its tentacles in both areas but Arista Networks (ANET-N), a much cheaper stock than Nvidia, is also expected to be a major beneficiary in switching. Marvell Technology Inc. (MRVL-Q), Broadcom Ltd. (AVGO-Q), Coherent Corp. (COHR-N), and China-based Zhongji Innolight Co. Ltd. are poised for sales growth by producing transceivers.
Citi believes that data storage is a critical priority for AI networks – the computing power needs to speed through datasets quickly. This is particularly the case when AI networks digest new information to train their models. The analyst cites Dell Technologies Inc. (DELL-N), NetApp Inc. (NTAP-Q), Cisco Systems Inc. (CSCO-Q) and Pure Storage Inc. (PSTG-N) as likely beneficiaries although the last of those is now trading at 152 times trailing earnings.
I consider the Citi report as a companion piece to the Goldman Sachs report I detailed last month wherein Goldman’s chief U.S. equity strategist David Kostin attempted to identify the stock market winners for the next stage of AI development. It is a good sign for Broadcom Ltd., Marvell Technology, Advanced Micro Devices, Cisco Systems and Arista Networks that they were touted in both reports.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Ambev SA (ABEV-N) This subsidiary of beverage giant Anheuser-Busch InBev SA/NV has a market cap of US$32.75-billion, and is pretty diversified as a beverage maker. This enterprise likely sells your drink of choice, as not only does it vend alcoholic beverages such as Stella Artois, Corona, Mike’s and Hoegaarden, but also carbonated and energy drinks, water and more. Recently the stock has fallen on challenging times, down from above US$9 where it traded just over a decade ago, to near the US$2 mark today. But the Contra Guys argue that Ambev has much to offer.
The Rundown
What Canadian investors should do about our plodding, much-maligned stock market
Investing giant Vanguard found in a recent study that just more than 50 per cent of the stock market exposure in Canadian investor portfolios is allocated domestically. That’s down from 67 per cent in 2012. But Vanguard thinks Canadians are still putting their portfolios at risk through their home bias. Rob Carrick gives us his thoughts on the matter, as does Tom Bradley.
Many income stocks were hammered in the first half. But these three were big winners
We’re half-way through the year, and income investors are still having trouble gaining traction, despite the Bank of Canada rate cut in early June. But if you look hard enough, some dividend-paying stocks have performed well of late. Gordon Pape profiles three of them that he likes.
This is the average return you should expect from Canadian blue-chip stocks
If you want to know what to expect from Canadian blue chip stocks as a long-term investor, let one of the country’s biggest, more battle-hardened ETFs be your guide, reports Rob Carrick.
How to ensure stable dividends over the summer
Some people take a break from the stock market by selling in May, moving to bonds, and going away until they return from their summer vacay. This seasonal timing method often works well in Canada. Now, Norman Rothery sees what happens when he applies the strategy to the Stable Dividend portfolio.
Also see: Norman Rothery’s latest portfolios for Dividend and Value Investors
Canada’s robo-advisers are delivering different returns to their customers. Why?
Consumers need to be aware that robo-adviser portfolios can differ significantly from firm to firm both in their asset allocations and their approaches to portfolio management, says Benjamin Felix. This can lead to the potential for meaningful differences in long-term returns.
Echoes of dotcom bubble haunt AI-driven U.S. stock market
A U.S. stock rally supercharged by excitement over artificial intelligence is drawing comparisons with the dotcom bubble two decades ago, raising the question of whether prices have again been inflated by optimism over a revolutionary technology, reports Reuters.
Also see: Hedge funds dump tech stocks at fastest pace since 2016, Goldman shows
Retirees: Is it better to invest in bonds or GICs?
Four years ago, fixed-income investments such as long-term bonds or GICs offered almost no return at all. That changed when inflation soared in 2022. While interest rates are now off their peaks, they still offer much higher nominal returns than they did in 2020. But which should retiree or aspiring retirees choose now: bonds or GICs? Actuary Frederick Vettese shares some insight.
Others (for subscribers)
Number Cruncher: Searching for momentum in U.S. consumer discretionary stocks
Wednesday’s analyst upgrades and downgrades for July 3, 2024
Tuesday’s analyst upgrades and downgrades for July 2, 2024
John Heinzl’s model dividend growth portfolio as of June 30, 2024
Globe Advisor
Stronger risk appetite drove investment strategies this RRSP season
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Ask Globe Investor
Question: Now that shares of Nvidia Corp. are well off their highs and the stock has split 10-for-one, do you think this is a good time to get in?
Answer: I wouldn’t make a straight-up bet on Nvidia at this point. The artificial intelligence story that propelled the chip maker’s stock to a gain of more than 200 per cent over the past year is now familiar to everyone, from billion-dollar hedge funds to retail investors with a few hundred bucks to spend. When a narrative takes hold of the public imagination, it’s often a sign that the rally may be getting long in the tooth.
That’s not to say Nvidia is a bad company. As the largest producer of AI chips, it likely has many years of strong revenue and earnings growth ahead of it. But that future growth may already be priced into the stock, which trades at about 47 times estimated earnings for the year ending in January, 2025.
Rather than invest in individual technology stocks, which can be extremely volatile – as evidenced by Nvidia’s recent pullback of nearly 13 per cent – it may be more prudent to get your tech exposure through a diversified index exchange-traded fund. That way, if a disappointing earnings report or some other piece of bad news sends the shares tumbling, your portfolio won’t take a direct hit. Granted, you won’t get the full benefit if Nvidia’s stock soars in price, but controlling your risk is the name of the game here.
The BMO S&P 500 Index ETF (ZSP-T), iShares Core S&P 500 Index ETF (XUS-T) and Vanguard S&P 500 Index ETF (VFV-T) are three worthy examples. Each ETF charges a management expense ratio of just 0.09 per cent and has a weighting of roughly 30 per cent in technology stocks, with the top three constituents – Microsoft Corp., Apple Inc. and Nvidia – collectively accounting for about 20 per cent of each ETF’s total assets. Plus, these ETFs give you exposure to financials, health care, communications, industrials, energy and other sectors that increase your diversification.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
We’ll have some insight from Rosenberg Research on the economic and investing consequences of the 2024 U.S. election, which - following last week’s debate - has been thrown into even greater uncertainty.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Darcy Keith of The Globe and Mail