Nvidia’s Surge Sharpens Focus on Hunt for AI Losers

Nvidia Corp.’s blowout sales forecast puts a fresh emphasis on the latest game in town: identifying artificial intelligence losers.

(Bloomberg) — Nvidia Corp.’s blowout sales forecast puts a fresh emphasis on the latest game in town: identifying artificial intelligence losers.

While traders scramble to find companies best positioned to capitalize on the rapid proliferation of AI tools, they’re also seeking out those most at risk of losing business to generative applications like OpenAI’s ChatGP. Lists of these have been doing the rounds on trading desks recently, while an index created by Bank of America Corp. tracks 27 companies that could be vulnerable.

“I’ve been pondering the obsolescence question a lot,” said Mark Lehmann, chief executive officer at JMP Securities. “The first step is looking for management teams that understand the challenges represented by this technology. Most people don’t know what’s about to hit them.”

One of the first companies to show how rapidly fortunes can shift in the age of AI was Chegg Inc. The education-technology company saw its stock drop by nearly 50% in a single day after saying that ChatGPT is threatening the growth of its homework-help services.

Chegg’s warning was “a moment of realization,” Lehmann said. “It was bound to happen to somebody, and it is a lesson to everyone: this is real, this is happening now, and if you’re not adapting, you’re lost.”

Bank of America’s AI Risk Basket has significantly underperformed this year, trading basically flat, compared with a 30% gain for an exchange-traded fund that tracks robotics and AI stocks, and a 27% advance for the Nasdaq 100 Index. Much of the latter’s gain has come on the back of megacap stocks with strong AI stories, including Microsoft Corp., which is integrating AI into its software, and Nvidia, whose semiconductors are used in computers powering AI applications.

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BofA’s at-risk basket includes software makers like Gitlab Inc. and Upwork Inc., as well as online travel agents, advertisers and staffing firms. Jefferies analyst Brent Thill has a similar list that includes Chegg, along with software providers Dropbox Inc. and Five9 Inc.

In a sign of how quickly fortunes and sentiment shift, BofA’s basket also includes Alphabet Inc. While the Google parent initially faced concerns that it was falling behind Microsoft in the AI race, recent updates and developments have eased those fears, powering a month-to-date rally of 17%.

A Bank of America representative declined to comment about the index.

According to Arthur Weise, chief investment officer at Kingsland Investments, it’s too soon to call the winners and losers, with AI remaining in its infancy as a technology. There’s no way any list of “AI Roadkill” can have any value right now, he said.

Still, AI is proving to be the latest disruptor in the technology space and some larger firms are already making preemptive moves. International Business Machines Corp., for example, expects to pause hiring for jobs it thinks could be replaced with AI in the coming years.

Still, the biggest struggles are likely to be faced by those companies that have fallen behind in introducing AI to their products and services.

In the longer term “there’s a risk that these companies get disrupted by generative AI,” said Matthew Kanterman, director of research, Roundhill Investments. Some may need to launch their own products in the space “before someone takes the moat away,” said Kanterman, who co-manages the newly launched Roundhill Generative AI & Technology ETF.

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Nvidia’s stock gains have put its market value within touching distance of $1 trillion, where it would rank alongside the five megacap companies that already reached the milestone. Based on post-earnings prices, the chip giant’s market capitalization is poised to rise by $189 billion to an all-time high of $944 billion.