Why Nvidia, Broadcom, and Other Artificial Intelligence (AI) Stocks Soared This Week

Most market observers would agree that one of the dominant forces driving market growth over the past year is advances in artificial intelligence (AI). On the other hand, investors have been closely watching the trajectory of the economy as inflation continues to decline. Recent economic indicators suggest the conditions are right for the Federal Reserve Bank to begin cutting interest rates, which could happen later this month.

Investors have also been very interested in the rate of AI adoption, looking for indicators that this trend still has legs, and recent results suggest that these secular winds continue to blow.

With that as a background, semiconductor specialist Broadcom (AVGO 4.54%) up 20.7% this week, AI chip specialist Nvidia (NVDA 2.27%) up 17.1% and the database and cloud AI provider Oracle (BBAI) rose 13.9% as of 2:57 p.m. ET Thursday, according to data from S&P Global Market Intelligence.

It appears that strong results from one member of the trio and hopes of a rate cut helped spur a rally in the space.

Image source: Getty Images.

A double dose of good news

Late last week, Broadcom reported its fiscal third quarter 2024 results (ended Aug. 4), and while the results were better than expected, shares initially sold off on the news. However, as investors had time to digest the results, cooler heads prevailed, helping a rally.

Broadcom generated revenue of $13.1 billion, up 47% year-over-year, while adjusted earnings per share of $1.24 rose 18%. The results were fueled by strong demand for the company’s Ethernet and custom accelerators used in AI-centric data centers. At the same time, however, Broadcom’s smartphone chip business — once its main backer — continues to struggle.

That weakness in Broadcom’s legacy business contributed to weak guidance for the upcoming fourth quarter, which helped fuel the initial selloff. However, the company received some good news earlier this week, as Apple unveiled its iPhone 16 lineup. KeyBanc analysts listed Broadcom as one of the main beneficiaries, as upgrading to Wi-Fi 7 on these devices requires Broadcom hardware.

In addition, after a prolonged battle with inflation, the central bank is expected to announce the first of a series of interest rate cuts when Fed officials wrap up their two-day policy meeting, which ends on September 18. Most market watchers now believe a rate. 0.25% discount is now imminent.

Also worth noting, Nvidia CEO Jensen Huang reassured investors this week about the state of AI adoption. During an interview at a technology conference, he noted that the company is experiencing “incredible” demand for its AI processors. As the standard-bearer for AI, this seems to suggest that the trend has a long run ahead.

now what

What do interest rate cuts have to do with these three AI actions? The prospect of reaping the productivity rewards of generative AI is certainly intriguing, but some companies have been reluctant to make new business investments in the face of difficult economic conditions. The first interest rate cut will be an acknowledgment by the central bank that the economy has finally turned the corner. This could be the first in a series of rate cuts that will likely spur further AI adoption. This, in turn, would benefit our trio of AI-focused companies.

• Broadcom makes many of the semiconductors and other technologies used in data centers, where most of the AI ​​resides.
• Nvidia is the leading provider of graphics processing units (GPUs) that provide the computing power needed to power AI systems.
• Oracle offers AI database and cloud infrastructure capabilities many will choose to join the AI ​​revolution.

AI adoption has a long way to go. The market is expected to be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company. Even if they only take a sliver of this opportunity, Nvidia, Broadcom, and Oracle stand to benefit greatly — and so will their shareholders.