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Why Artificial Intelligence (AI) Stocks Super Micro Computer, Advanced Micro Devices, and Intel Rallied Today

Motley Fool - Tue Nov 14, 2023

Shares of artificial intelligence beneficiaries Super Micro Computer(NASDAQ: SMCI), Advanced Micro Devices(NASDAQ: AMD), and Intel(NASDAQ: INTC) were rallying today, up 14.9%, 2.7%, and 3.1%, respectively.

AMD was initiated with a "buy" rating at a sell-side firm today, but its move higher was likely due to the lower inflation print this morning, which lifted most stocks across the board.

Semiconductor and AI hardware stocks are thought to be highly cyclical. The prospect of easing inflation and therefore lower interest rates is especially good for these sectors, barring a recession.

AMD gets a buy as lower inflation could extend the AI boom

The day started off especially well for AMD, which garnered a "buy" rating at sell-side firm Roth MKM. The firm has a $125 price target on AMD given its growth opportunities, especially in the data center.

AMD stock recently rose on the back of CEO Lisa Su projecting at least $2 billion in revenue next year for AMD's MI300 AI accelerator, its new chip that it hopes will rival Nvidia(NASDAQ: NVDA) graphics processing units (GPUs) and make inroads into the red-hot AI data center market.

Intel also hopes to make inroads in the data center, not only with the upcoming release of more advanced data center central processing units (CPUs) but also for its Gaudi AI accelerators. Intel is also embarking on an ambitious plan to construct a foundry to serve chip customers besides itself and may also benefit from potential AI customers. That build-out, however, will take a lot of capital.

Today, a lower-than-expected consumer price index (CPI) reading lit a fire under virtually all stocks, as the new reading sparked hopes the Federal Reserve is now done with interest rate hikes and may even begin lowering them, hopefully without the economy having to enter a recession.

That would greatly benefit Intel, which has seen its profits squeezed and cash flow go negative, as its foundry investments have coincided with a deep slump in its main PC processor business that generates most of its cash flow.

So, a lower-rate environment would not only benefit sales of big-ticket items such as PCs but may also allow Intel to raise money at lower interest rates. Recently, Intel announced it was planning a sale of part of its FPGA business. Thanks to lower rates and a potentially improved economic outlook, Intel may be able to raise more money from that asset sale as well.

Bull graphic on a semiconductor chip.

Image source: Getty Images.

Finally, Super Micro Computer has already been a huge winner in 2023, up 144%. But to start the day, it still found itself about 30% below its all-time high reached this year. Super Micro is seeing a huge growth and profit acceleration this year, as its energy-efficient and highly customizable servers have been big beneficiaries of the AI boom.

Super Micro is now a $15 billion market-cap company, but its stock is volatile and is often grouped in with small-cap-stocks. The Russell 2000 small-cap index was up over 5% today, as stocks perceived as "riskier" rallied harder, given the relief in interest rates.

Skeptics for Super Micro's year-to-date rally have also piled on, with the stock's short interest above 10% of the company's public-share float as of the end of October.

At just 27 times trailing earnings and a low-teens multiple on this year's expectations, Super Micro has never traded at a demanding valuation. Still, it's possible those who feared higher rates for a longer period of time anticipated higher rates would eventually curtail investment in artificial intelligence. After all, AI chips and servers are very expensive, even though they may become table stakes for any company hoping to outdo rivals going forward.

Yet with lower interest rates now a higher probability thanks to today's lower inflation reading, that could sustain or increase AI investment on the part of big cloud providers and others. So that sunnier outlook, perhaps with some short covering on top, fueled Super Micro's massive rally today.

Chip stocks are volatile but are long-term winners

Many investors steer clear of semiconductor stocks because of their extreme volatility. However, if one chooses the right chip companies for a portfolio and takes a long-term perspective, many chip stocks have outperformed the markets and even the overall tech sector over the past decade. Therefore, those stocks at the forefront of the AI revolution are a must-add for young growth investors' portfolios.

While one needs a strong stomach to weather bad years like 2022, today was a good example of why these stocks are great choices for the risk-on investors with lots of time to compound their wealth.

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Billy Duberstein has positions in Super Micro Computer and has the following options: short January 2025 $110 puts on Super Micro Computer, short January 2025 $125 puts on Super Micro Computer, short January 2025 $130 puts on Super Micro Computer, short January 2025 $280 calls on Super Micro Computer, short January 2025 $380 calls on Super Micro Computer, and short January 2025 $85 puts on Super Micro Computer. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.

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