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Why shares of C3.ai, Intel, Advanced Micro Devices and other artificial intelligence (AI) plummeted on Friday

One of the biggest catalysts driving the market higher in the past year has been the rise of artificial intelligence (AI). Both companies and market observers agree that the potential for productivity increases could boost profits, benefiting both companies and shareholders. Investors are also waiting on the edge of their seats for insight from the Federal Reserve Bank on the future trajectory of interest rates, and when the central bank might change course and start cutting rates.

With that as background, AI software maker C3.ai (NYSE:AI) fell 5.2%, chipmaker Intel (NASDAQ: INTC) fell by 5.2%, specialist in semiconductors Advanced micro devices (NASDAQ: AMD) fell by 4.2%, specialist in memory and storage solutions Micron technology (NASDAQ:MU) fell by 3.9%, and foundry Taiwanese semiconductor manufacturing (NYSE: TSM) fell 3.2% by the time the market closed on Friday.

A check of all the usual suspects – regulatory filings, financial reports and changes in analyst price targets – revealed a few pieces of company-specific news to explain the falling stock prices (more on that later), suggesting many investors are heavily focused on the economy and geopolitical conflicts.

A hologram of the letters AI projected above a computer chip.

Image source: Getty Images.

The bleak prospects of a short-term interest rate cut

Investors were eager for a round of interest rate cuts to begin, finally putting an end to the ongoing struggle to curb inflation. Yet recent reports suggest that higher prices are not yet behind us.

The latest monthly inflation report, courtesy of the U.S. Bureau of Labor Statistics, showed inflation to be surprisingly persistent, sending a wave of concern across Wall Street. The consumer price index (CPI), the most widely watched inflation gauge, rose 3.5% in March compared to the same period a year ago, while it was only 0.4% higher on a monthly basis.

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The increase was greater than hoped; Economists had expected annual growth of 3.4% and 0.3% sequentially. Ahead of the report’s release, investors had hoped that the first of several rate cuts this year would come in June, but the specter of persistent inflation dashed those hopes.

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

Why inflation matters

What does this have to do with our five AI stocks? The biggest problem is the higher cost of borrowing money, so companies are unlikely to expand their operations and adopt next-generation technologies, including generative AI.

  • C3.ai creates plug-and-play AI software models for businesses. It is unlikely that companies will incur additional costs as long as inflation remains high.

  • Intel produces semiconductors that power data centers and AI systems, but are also likely to see slower adoption.

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

  • Micron Technology offers flash memory and storage systems that accelerate 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.

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Beyond these issues, there was mixed company-specific news that further muddied the waters.

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 increased pessimism.

There was also a report from Cleveland Research that suggested Intel be able to losing market share in the PC and server markets. There were also reports that China has ordered telecom companies to begin phasing out the use of foreign processors, which – if true – could have a direct impact on Intel and AMD.

An earthquake in Taiwan earlier this month could hit Micron’s current quarter results as the company has not yet returned to full production of its dynamic random access memory (DRAM) processors. However, Citi Analyst Christopher Danely thinks this could be positive for Micron, as less supply leads to higher prices. He noted that any decline in sales would be temporary.

Appreciations across the board

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

I’m not a fan of Intel, as the company is stuck in a years-long turnaround and has yet to prove that its efforts will succeed. Of the stocks presented, I think TMS and Micron offer the most upside, like the pick-and-shovel game in the AI ​​revolution.

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There is still a long way to go for generative AI, and the opportunities remain enormous. However, investors should be prepared for a lot of volatility going forward, even though 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 positions in any of the stocks mentioned. The Motley Fool holds 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 options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

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

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