Why shares of C3.ai, Intel, advanced microdevices and other artificial intelligence (AI) stocks fell on Friday

One of the biggest catalysts driving the market higher over the past year has been the advent of artificial intelligence (AI). Both companies and market watchers agree that the potential for increased productivity could boost profits, benefiting both companies and shareholders. Investors are also waiting on the edge of their seats for information from the Federal Reserve Bank on the future path of interest rates and when the central bank might reverse course and start cutting interest rates.

With this as a backdrop, AI software maker C3 (NYSE: AI) chip maker fell 5.2% Intel (NASDAQ: INTC) fell 5.2%, specialist in semiconductors Advanced microdevices (NASDAQ: AMD) fell 4.2%, specialist in memory and storage solutions Micron technology (NASDAQ: MU) dropped 3.9%, and melted Taiwan Semiconductor Manufacturing (NYSE: TSM) it fell 3.2% when the market closed on Friday.

A check of all the usual suspects—regulatory filings, financial reports, and changes in analysts’ price targets—revealed some company-specific news to explain the share price drop (more on that in a mica), which suggests many investors are very focused on the economy and geopolitical conflicts.

The dim prospects for a near-term rate cut

Investors have longed for the start of a round of interest rate cuts, which would finally kick-start the ongoing battle to control inflation. However, recent reports suggest that higher prices are not far behind.

The latest monthly inflation report, courtesy of the US Bureau of Labor Statistics, showed that inflation was surprisingly stubborn, sending a wave of anxiety on Wall Street. The consumer price index (CPI), the most widely watched inflation gauge, rose 3.5% in March compared to the same period last year, while it rose just 0. 4% month after month.

The increase was higher than expected; economists had expected 3.4% year-on-year and 0.3% sequential. Ahead of the report’s release, investors had expected the first of several interest rate cuts this year to take place in June, but the specter of lingering inflation dampened those hopes.

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The ongoing war between Israel and Hamas is also weighing on market sentiment as investors fear the conflict could expand in the region.

Why inflation matters

So what does this have to do with our quintet of AI stocks? The biggest problem is the high cost of borrowing money, as companies are unlikely to expand operations and adopt next-generation technologies, including generative AI.

• C3.ai builds plug-and-play AI software models for businesses. Businesses are unlikely to take on additional costs as long as inflation remains high.

• Intel makes semiconductors that help power data centers and AI systems, which will likely see slower adoption as well.

• AMD graphics processing units (GPUs) are a key component that facilitates the training and deployment of AI systems. These processors are expensive, at tens of thousands of dollars or more, so companies are likely to delay adoption while borrowing costs are high.

• Micron Technology provides flash memory and storage systems that speed up AI processing, so it will also be affected by higher interest rates.

• Taiwan Semiconductor Manufacturing, commonly called TSM, is the foundry that brings many of these AI chips to life, so slower AI adoption means fewer semiconductor sales.

Aside from these issues, there was some company-specific news that muddied the water even more.

bank of america analyst Vivek Arya lowered his price target on Intel to $44 while maintaining a neutral (hold) rating on the stock. This represents a potential upside of 17% compared to Thursday’s closing price. The analyst cited disappointing results from Intel’s foundry segment for the increased pessimism.

There was also a Cleveland Research report suggesting Intel may be losing share in the personal computer and server markets. There were also reports that China has instructed telecom companies to begin phasing out the use of foreign processors, which, if true, could directly affect Intel and AMD.

An earthquake in Taiwan earlier this month may affect Micron’s results in the current quarter, as the company has not yet returned to full production of its dynamic random access memory (DRAM) processors. Despite this, Citi analyst Christopher Danely believes this could be a positive for Micron, as lower supply leads to higher prices, noting that any decline in revenue would be temporary.

Transversal assessments

In terms of valuation, this stock group is a mixed bag. AMD, C3.ai, TSM, Micron, and Intel are currently trading at 8x, 7x, 7x, 4x, and 2x forward sales, respectively, making Intel the most attractive. When measured using a price-to-earnings-to-growth (PEG) ratio, which takes into account a company’s current growth trajectory, TSM, AMD and Intel have multiples of less than 1, the standard for a stock underrated

I’m not a fan of Intel as the company has been mired in a turnaround for years and has yet to prove that their efforts will succeed. Among the stocks featured, I think TMS and Micron offer the most upside as the pick-and-shovel plays in the AI ​​revolution.

There is still a long road ahead for generative AI, and the opportunity remains great. However, investors should be prepared for high volatility, even if the overall trajectory is likely to remain up and to the right.

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Citigroup is an advertising partner of The Ascent, a Motley Fool Company. Bank of America is an advertising partner of The Ascent, a Motley Fool Company. Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America and Taiwan Semiconductor Manufacturing. The Motley Fool recommends C3.ai and Intel and recommends the following: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel and short May 2024 $47 on Intel. The Motley Fool has a disclosure policy.

Why C3.ai, Intel, Advanced Microdevices and Other Artificial Intelligence (AI) Stocks Fell on Friday was originally published by The Motley Fool