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Worried about Nvidia? This stock offers clues about when AI will go mainstream, Scotiabank says
PUBLISHED TUE, JUL 2 2024•7:09 PM EDT

Ganesh Rao @_GANESHRAO

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Nvidia ‘s share price has been volatile over the last month amid some concerns over future demand for AI chips, and the pace at which artificial intelligence will become widely adopted. The stock has more than doubled this year as the company logged high double-digit net profit growth in the first two quarters of this year, but its shares fell 13% over three trading days last month, before bouncing back. NVDA 1Y line Large cloud computing firms, such as Microsoft , Amazon and Google , have bought billions of dollars worth of AI chips from Nvidia over the past two years. Investors now want to know whether these Big Tech giants will be able to make a return on their investment — a precursor for further spending on AI chips. “There’s still questions about demand. Where is the profitability of the [companies] spending all of this money? How are they going to keep doing that? How is that going to accelerate in the years to come?” Raj Shant, managing director at Jennison Associates, one of the top 10 shareholders of Nvidia, said on CNBC’s “Street Signs Europe” Monday. However, history shows that major technological developments tend to take longer than expected to improve productivity. The impact of railways, for example, first introduced in Britain, took around 70 years to be seen in productivity data, according to Capital Economics. However, the lags for technologies invented since then have shortened. “Nvidia investors are part of a long tradition of attempting to capture the benefits of new technologies ahead of them fully materialising in the real economy,” Capital Economics’ Chief Economist Neil Shearing said in a note to clients on July 1. “This was true during the ‘Railway Mania’ of the late 19th century, and more recently during the dotcom boom at the end of the last century.” However, “tentative” signs have started to emerge that spending on AI chips may be spurring investment in the broader economy, Capital Economics said. Economists at the consultancy believe productivity improvements seen over the past two quarters in the U.S. economy can be partly attributed to “investment in software rather than hardware.” Yet they caution that much of the productivity gains won’t be felt until the end of this decade. “We remain of the view that the boost to productivity from AI will be substantial … but that this boost won’t arrive until the second half of this decade,” Shearing added. CGI Inc For clues as to how quickly AI technologies are being adopted, Scotiabank highlighted CGI , a Canadian multinational IT firm that helps companies introduce AI into their business models and operations. CGI shares are traded in the U.S. and Canada. Last year, CGI revealed plans to invest $1 billion over three years to expand its AI capabilities. But Scotiabank analyst Divya Goyal highlighted a “slower than anticipated adoption of the technology” among its customers. Many businesses are still in the “discovery phase” phase of the AI trend, Goyal said, which involves producing proof-of-concept applications, while others are waiting for AI software to gain maturity before implementing them. According to the analyst, many companies are looking to transition to a viable AI-powered service in the next 6 to 24 months. GIB 5Y line “As per the CGI team, while ~80% of the clients are currently exploring [generative] AI, less than 10% are in implementation stage with limited dollars currently being allocated for such Gen AI deployments,” Goyal said. The Scotiabank analyst believes that as large companies prepare to start AI spending, CGI is set to benefit and capture any future growth. “We believe CGI is well-positioned to cater to the growing demand for AI engagements across its global clientele,” Goyal said. Scotiabank expects CGI shares to rise 17% from the current share price of 136.55 Canadian dollars ($99.62) for Toronoto-listed stock, and $99 for New York-listed stock.

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