Nvidia and other stocks “approaching the trough of disillusionment” over GenAI

That may partly explain why Apple and tech stocks got hit so hard by the Barclays’ advice to sell the stock on Tuesday.

We stay on the tech sector in our call of the day from a D.A. Davidson analyst, an early fan of generative artificial intelligence (GenAI) who is now warning the software sector is “approaching the trough of disillusionment” over the technology.

Gil Luria, senior software analyst, said he hasn’t changed his year-ago view that GenAI would be the “most important transformative technology since the internet,” but notes how companies now regularly trot out related products and strategies.

“We expect the market to do what the market does and compete the gains away from all but a few. We may be experiencing the most FOMO [fear of missing out] shortened cycle to date,” Luria told clients in a note.

Chats with industry participants have revealed “significant obstacles” for enterprise customers in implementing GenAI solutions, as they first need to modernize existing data, and even set up AI committees to deal with cybersecurity impacts and other issues. That means more time will be needed to ramp up those solutions, he said.

The analyst expects just a few companies will be able to point to direct GenAI revenue benefits — Nvidia
NVDA,
Microsoft
MSFT
and “generously” Adobe
ADBE.
“We expect this number to expand this year as a few more companies crack the code and find a new GenAI killer app, but believe it unlikely they all do.”

He sees Amazon
AMZN
and Google
GOOGL,
via their cloud platforms, along with Snowflake
SNOW,
leveraging investments in GenAI infrastructure “to allow everybody else to play with their own products.”

But as for Nvidia, in a separate note he assumed coverage on the company with a neutral rating and $410 price target, as he warned the AI chip giant is vulnerable to that coming “trough of disillusionment.”

Luria explains many Nvidia’s customers will fill their GenAI capacity over this year, a shift that will start to fade in 2025. Included in his price target is $155 per share for “sandbox” revenue coming in from GenAI. “We believe the value of this sandbox could drop considerably once NVDA growth rolls over.”

He’s got a more upbeat view on Amazon, where he assumed coverage with a buy rating and a $195 per share target, up from a previous $157. “We believe a potential reacceleration of growth in AWS [Amazon Web Services] could drive upside to shares in 2024, as AMZN gets some of the GenAI boost already in MSFT [buy-rated at D.A. Davidson], GOOGL and META
META
shares,” he said.

Finally, Luria discussed Apple in a separate note, assuming coverage with a neutral rating and $166 per share price target, both the same as previously.

Apple will likely return to “moderate growth” this year, boosted by services and easier comparisons on Mac sales, but needs to get “unstuck” on innovation to help generate product growth, as wearables seem to have plateaued, he said.

Like Barclays, Luria also sees iPhone domination challenges. “While Apple may have a strong hold on existing handset owners because of the strength of its ecosystem, it will need to be more creative in order to convert new consumers to the iOS ecosystem,” notably in places like China.

GenAI applications could prompt some of that new innovation, with Apple “in a position to leverage an unparalleled walled garden consumer data set to provide new applications and experiences,” said Luria.

The markets

Losses are building for U.S. stock index futures
ES00

YM00

NQ00
as Treasury yields

rise on questions over Fed rate-cut timing. Oil prices
CL
are slipping. Asia markets

followed Wall Street lower.

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The buzz

The minutes of the Fed’s December meeting will be released at 2 p.m., and could shake up rate-cut expectations. Ahead of that, Richmond Fed President Tom Barkin will speak at 8:30 a.m., with job openings and the ISM manufacturing index at 10 a.m. Auto sales are also ahead.

Agios Pharmaceuticals
AGIO
is up nearly 20% after the biotech announced positive results from a Phase 3 trial of a rare blood disorder treatment.

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