The market is cooking. It’s up 8% already this year and has been trending higher for well over a year. The bear market of 2022 has been overcome and erased. We are in a new bull market that has picked up steam lately. The S&P 500 has soared 26% since late October.
While technology has been the best-performing sector by far in this bull market, the latest 26% surge has included broad participation with most other stock sectors also delivering strong returns. But this rally is getting rather long in the tooth and most stock sectors will need things to play out just right going forward to continue moving higher.
Things could get dicey. Stocks have been reveling in an environment where inflation has come way down, interest rates have peaked and should trend lower, and the economy is strong. But that rosy prognosis may be coming to an end.
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Although the rate of price increases has come way down, inflation is still sticky and far above the target. It’s down but not out. Inflation that isn’t dead has a way of coming right back when the Fed takes its foot off the gas. That’s what has happened in the past. In fact, inflation that has trended above 5% for a year or longer has always taken at least a decade to get rid of. The Fed knows this and will be very reluctant to deliver the rate cuts that the market has already priced in unless the economy tanks.
But lower rates are needed soon to preserve this recovery and bull market. Going forward, either rates will stay high and perhaps move higher or the already high rates will start to drive down the economy. The overall market won’t like persistent high rates or recession. Of course, it is certainly possible that stocks manage to navigate this environment and continue to move higher anyway.
But there’s a better bet – artificial intelligence.
Huge demand for AI products and services has driven the technology sector and market higher over the past year. Since the Nvidia (NVDA) earnings report last spring that reflected enormous AI demand and shocked the market, that stock is up 213%. Since late October, NVDA is up 118%, Broadcom (AVGO) is up 48%, and the Vanguard Information Technology ETF (VGT) has rallied 30%.
But you haven’t missed the boat. The AI catalyst is likely to power many technology stocks higher for years to come. AI is a technological game changer that companies can’t afford to miss. Efficiencies and cost savings are a crucial matter of survival among the competition, and businesses are scrambling madly to adopt the technology.
The AI market in the U.S. is expected to grow from $86.9 billion in 2022 to $407 billion by 2030. Global estimates for the industry have it around $500 billion in 2022 growing to over $2 trillion by 2030. Estimates vary of course, but I haven’t seen any estimates with less than 20% annual growth until 2030. Research firm Grand View Research estimates the AI market will grow by a staggering 37.3% per year from 2023 to 2030.
AI adoption and demand for products and services will continue at breakneck speed regardless of what happens with inflation, or the Fed, or economic growth or whoever is elected president.
The AI craze of the past year is just the first wave. Many great companies that aren’t benefiting from AI demand immediately haven’t soared in price yet, or at least to the degree they are likely to going forward. One stock, in particular, should be a huge AI beneficiary but hasn’t had its day in the sun yet. But it has started taking off and is likely to move much higher over the course of this year.
An AI Stock That’s Just Taking Off
Qualcomm Incorporated (QCOM)
Yield: 1.9%
Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. Chips account for roughly 75% of revenues while licensing from patents accounts for 25%, although the smaller area is more profitable and better insulated from competition.
Big deal, there are lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of chips for smartphones and ones that enable mobile 5G technology.
Analysts estimate that the 5G chipset market will grow from $2.1 billion in 2020 to over $23 billion by 2026. That was a good track. Then the huge catalyst of AI emerged to power the potential earnings and stock upside far higher.
But QCOM was a sector laggard in 2023 despite the AI boost and tech sector dominance. QCOM returned 38.5% for the year while the overall technology sector was up over 50%. Almost all of QCOM’s 2023 performance came in the last two months of the year. The stock has strong momentum and is up about 60% since late October. But you probably haven’t missed the boat because QCOM still trades about 14% below the 2022 high.
The issue is that device sales are cyclical, and last year’s smartphone sales struggled because of excess inventory. Qualcomm’s revenues were down about 20% in 2023. Semiconductors are a cyclical industry subsector as well. But things are turning around. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year after a decline of 8.2% last year, despite a strong second-half recovery. Leaders like Qualcomm should experience a much higher level of growth than the overall industry.
Early indications are that this year will be much better for smartphone sales than last year. In the last quarter, Qualcomm reported a strong revenue jump over last year’s quarter for smartphone chip sales. The chipmaker is also expecting a 5% rise in sales from smartphone revenue this year.
The company has also been making important strides in high-growth areas. For example, it has a strong showing in its automotive segment where it posted a 31% year-over-year revenue increase in the fourth quarter. The segment is still small, representing about 6% of revenues currently. But these car chips are in high demand, and it could be a huge market in the years ahead.
Qualcomm reported earnings and revenues that soundly beat expectations in the fourth quarter with 5% revenue growth and 16% higher earnings than last year’s quarter. It marked a return to earnings growth after four straight quarters of declines and the company guided slightly higher than expectations for the current quarter.
Meanwhile, Qualcomm is introducing new AI-enabled chips for smartphones and personal computers (PCs) as well, a new market for the company. The biggest beneficiaries of the initial AI boost were the companies that benefit from the technology more immediately. But as AI continues to proliferate, it will certainly find its way to mobile devices, and Qualcomm will be a primary beneficiary. When this stock moves it can make up for lost time fast.
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