Digital Infrastructure Stocks Benefit From Growing Interest In Generative AI

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Our theme of Internet Infrastructure Stocks – which includes a diverse set of companies that sell hardware and software that underpin the Internet — had a rough 2022, declining by about 39% through the year, amid supply chain disruptions and a shortage of semiconductors. However, the theme remains up by about 12% thus far in 2023,  outperforming the S&P 500 which gained about 4% over the same period. So are things likely to get better this year?

Capital spending on data centers by major public cloud players such as  Amazon, Microsoft, and Google expanded by about 33% in 2022 [1] driven by strong growth in demand for cloud computing. However, with signs of a cooling economy, businesses, and major Internet behemoths, have indicated that they could be more careful with their data center spending. That said, there are some positive trends that could drive Internet infrastructure-related investments as well. Following the success of OpenAI’s generative AI tool ChatGPT, the tech behemoths appear to be doubling down on the artificial intelligence space. Now AI workloads are computationally very heavy and this could drive demand for areas such as accelerated computing. Besides this, the broader deployment and adoption of 5G in the United States and overseas, as well as an increasing focus on areas such as network and cyber security, could drive the theme. There is also a possibility that supply chain issues, which proved to be a constraint for much of the industry through 2021 and 2022 could ease, helping revenue growth for the stocks in our theme. Moreover, several stocks in the theme trade at below-market multiples, and it’s possible that they could find favor if investors rotate into value stocks to play rising interest rates and tighter monetary policy.

Within our theme,   Nvidia (NASDAQ:NVDA) stock has been the strongest performer, rising by about 60% year-to-date, as investors entered the stock, which lost almost 50% in 2022, amid optimism about demand for AI chips. On the other side, Juniper Networks (NYSE:JNPR) stock has fared worse than the other stocks in our theme, declining by about 6% year-to-date.

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What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Mar 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 NVDA Return 0% 60% 774%
 S&P 500 Return 0% 4% 78%
 Trefis Multi-Strategy Portfolio 1% 8% 241%

[1] Month-to-date and year-to-date as of 3/3/2023
[2] Cumulative total returns since the end of 2016

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Notes:
  1. CXOToday []