For five months since the market took off at the end of October, 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 the market has started showing some signs of weakness in April with fears that the Fed won’t be cutting rates any time soon.
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.
Although it may not seem like it in light of the recent tech-driven sell-off, technology, as measured by the Vanguard Information Technology ETF (VGT), is still up 20% since the end of October. Before, tech was beating the return of the S&P 500, now it’s merely matching it.
Huge demand for AI products and services has driven the technology sector and market higher over the past year and 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.
Qualcomm Incorporated (QCOM)
Yield: 2.2%
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 40% since late October. But you probably haven’t missed the boat because QCOM still trades about 16% 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.