Source: Wall Street News
Author: Bu Shuqing
Goldman Sachs believes that although the revenue of tech giants such as Nvidia is growing rapidly, the cost of investing in AI is huge, causing the market to worry about the profitability and reasonable valuation of technology stocks. The fatigue of software stocks since this year may also reflect investors' concerns about AI.
Technology stocks, which until recently had been unstoppable, suddenly collapsed.
Overnight in US stocks, the NASDAQ index fell below the 21-day EMA for the first time since the beginning of May. The 50-day EMA support was around 18,200 points, and technical fatigue began. The market's panic buying of AI came to an abrupt end, and the semiconductor industry ETF SOXX once fell more than 3% intraday.
So what exactly happened that led to a sudden and drastic reversal in market sentiment?
Goldman Sachs TMT industry expert Peter Callahan shared his views on the tech stock crash overnight, highlighting two key words — profit margin and software.
Callahan mentioned that although tech giants such as Nvidia are growing rapidly in revenue, the cost of investing in AI is huge, causing the market to worry about the profitability and reasonable valuation of technology stocks.
The fatigue of software stocks since this year may also reflect investors' concerns about AI. The software industry has ushered in the worst earnings season in history. Former star Salesforce and other companies are facing serious challenges of slowing growth. Goldman Sachs believes that the software industry is still far from recovering.
Who will “pay” for Nvidia's high gross margin?
Callahan said that after the release of last week's earnings report, there is growing evidence that the company's focus is shifting from cost savings in 2023 to investment in 2024.
The main factors driving this transformation are Nvidia's projected revenue of $150-200 billion over the next few years, and gross margins as high as 75-80%.
The question is, who will “pay” for Nvidia's high gross margin?
Goldman Sachs pointed out that although most investors believe that increasing investment in AI is a good thing, the market may place higher demands on the return on these investments, hoping to see a more clear outlook on the profitability of enterprises in the AI field.
However, the recently released earnings report sent a number of unfavorable signals to profits:
Snowflake lowered its free cash flow and operating margin guidelines for the full year due to increased GPU (graphics processing unit) costs, as well as rising R&D and personnel costs.
Microsoft expects the operating profit margin for fiscal year 2025 to drop by about 1 percentage point year on year, mainly due to investment in cloud computing and AI, as well as the acquisition of Activision Blizzard.
Ultramicrocomputer's gross margin is expected to decline sequentially in the second quarter. The reason is that the company is focusing on driving strategic market share growth.
Affected by “inflationary cost pressure, competitive environment, and a higher share of AI-optimized servers,” Dell lowered its annual gross margin guidance by 1.5 percentage points.
Chipmaker Marvell's guidelines also showed weak gross margins in the second half of the year. The company said that orders for custom chip projects (which usually have low gross margins) showed a sharp increase.
The huge cost investment of AI has raised concerns in the market about the profitability and rationality of the valuation of technology stocks.
What does the complete collapse of software stocks mean?
Back on Thursday, US software stocks crashed across the board: the software sector of US stocks recorded the biggest one-day decline in nearly 2 years, Salesforce stocks had the worst performance in more than 20 years, and Goldman Sachs's growth software basket has entered the “oversold” region.
Callahan believes that investors' sentiment towards software stocks has collapsed, and there is a “better kill than let go” sentiment about related individual stocks. For example, cloud computing service management software company ServiceNow and cloud security software company CrowdStrike plummeted despite good financial performance.
Weak earnings reports from Salesforce and enterprise automation software company UiPath heightened concerns about a further slowdown in software spending in the first half of the year.
Callahan said this could delay the point in time for the software industry to recover, making recovery in the second half of 2023 more difficult to achieve.
It is worth noting that since this year, the weakness of the software sector is in stark contrast to the strength of other technology sectors (such as public clouds), triggering people to think about three reasons behind it:
First, the software industry is in the late stages of the economic cycle, so it is normal for employment to slow down during peak periods.
Second, weakness in the software sector is still the norm after the COVID-19 pandemic, especially considering the customer base of software companies.
It is worth noting the last point. Some people believe that this weakness reflects uncertainty in the AI field, leading to the transfer of software investment funds to other fields.
Goldman Sachs believes that in the context of the current economic cycle slowing down, it has become very challenging to invest in a long-term growth industry such as software.
The slowdown in the economic cycle, the complexity and uncertainty of AI, subtle differences in corporate valuations, and high interest rate pressure have led many investors to choose to temporarily reduce their exposure to the software industry and plan to refocus on this sector later this year, when the outlook for the industry is brighter.
Editor/Jeffy