"A sharp divide": Wall Street assesses the gains and losses as AI-fueled tech stocks tumble

Tech Stocks Face Investor Shifts Amid AI Uncertainty

In February, investors began moving away from technology stocks, leading to a decline of over 4% in the Nasdaq Composite over the past month. This shift was driven by growing concerns about the potential for artificial intelligence to disrupt established sectors.

Strategists Highlight Differences Within Tech Sector

Despite the overall downturn, Wall Street experts are distinguishing between various tech companies in the short term. Nancy Tengler, CEO of Laffer Tengler Investments, pointed out the notable difference in recent earnings reports between Nvidia, which her firm owns, and Salesforce, which they do not.

Tengler views Nvidia’s roughly 5% share price drop after its latest earnings release—and its flat performance so far this year—as an attractive entry point for investors.

Nvidia’s Prospects Supported by AI Infrastructure Spending

She believes Nvidia remains undervalued, especially considering that major cloud providers like Microsoft, Meta, Amazon, and Alphabet are expected to spend around $650 billion this year on data centers powered by Nvidia’s hardware for AI workloads.

“All the major cloud companies have indicated they lack sufficient computing capacity, which is essential for generating revenue,” Tengler explained. “Capital expenditures for one company translate into revenue for another, and that’s where Nvidia benefits.”

Salesforce: A Less Promising Path

Conversely, Tengler noted that her firm previously held Salesforce stock but decided to sell it some time ago. “We didn’t see a strong growth path for Salesforce and believed there were more promising opportunities elsewhere,” she said.

Further reading: How to protect your portfolio from an AI bubble

AI’s Impact on SaaS and Software Pricing Models

Recently, questions have arisen about whether customers of software-as-a-service (SaaS) companies might start building their own solutions using AI tools from providers like Anthropic’s Claude Code, potentially reducing their dependence on companies such as Salesforce. This shift could impact the sector significantly.

Additionally, if AI leads to greater efficiency and fewer employees are needed, traditional software pricing models based on the number of users or “seats” could be challenged.

“When your revenue depends on the number of users, you’re ultimately tied to employment trends. That’s why we chose to invest elsewhere,” Tengler added.

Rising Unemployment and Market Risks

Economists at Goldman Sachs predict unemployment could rise from 4.3% to 4.5% this year, citing risks from rapid AI adoption and job displacement.

Melissa Otto, head of visible alpha research at S&P Global, commented, “If the number of software users declines in the coming years, that’s a real concern.”

Memory Stocks Shine Amid AI Boom

Some strategists see stronger opportunities in the memory chip sector, which is vital for AI applications and has seen prices climb due to supply constraints. Memory prices have surged as a result.

“Memory stocks are performing exceptionally well,” Otto noted. “They have lower valuations and impressive upward earnings revisions, reminiscent of Nvidia’s trajectory two years ago.”

Major memory producers such as Micron, Western Digital, SK Hynix, and Samsung have collectively gained 60% so far this year. In contrast, the tech software ETF has dropped 24% since January.

Market Outlook Remains Uncertain

Despite viewing last month’s market sell-off as potentially exaggerated, strategists remain cautious about calling a bottom to the downturn.

Goldman Sachs analysts recently noted that worries about AI’s disruptive potential in software and other data-heavy industries—such as media, education, and business services—are likely to persist in the near future.

“We believe investors will want to see several quarters of solid business performance or much lower valuations compared to the broader market before they return to these stocks in large numbers,” wrote Goldman analyst Ryan Hammond and his team.

Investor worries about AI’s impact on established industries contributed to February’s market volatility. (AP Photo/Richard Drew)