After 2023’s blowout run, it’s hard to recall the once gloomy investing setup for technology stocks last December. Yes, it was only a year ago that once high-flying technology behemoths faced their biggest reality check yet as inflation hit multidecade highs and the Federal Reserve embarked on its most aggressive rate-hiking cycle in years, bringing an end to the zero-interest rate environment that allowed these giants to flourish. Twelve months later, the technology investing environment’s been virtually flipped on its head. The rise of artificial intelligence provided a much-needed catalyst for the troubled industry, and retail investors poured back into the sector’s fallen heroes. Rising Treasury yields pressuring the growth sector have retreated from highs, and investors are betting on easing financial policy, including several cuts from the Federal Reserve in 2024. “We’re seeing stocks basically through that full circle, making back what they lost in 2022,” said Jay Woods of Freedom Capital. This year, technology behemoths focused on trimming costs and cleaning up balance sheets, cutting jobs and unprofitable initiatives in what Meta’s CEO Mark Zuckerberg dubbed the “Year of Efficiency.” The moves pushed the social media stock to its best year on record. Simultaneously, a groundbreaking chatbot launched in late 2022 known as ChatGPT seized investor attention , igniting a heavyweight battle for large language model dominance between Alphabet and Microsoft, and a craze around all things AI . Behind the scenes, companies powering these tools didn’t get left in the dust . In fact, chipmakers experienced some of the most significant stock gains, situating themselves as the so-called picks and shovels of the AI world. Nvidia’s long history in creating graphics processing units necessary to power large language models framed it as the world’s AI poster child. As the calendar year turns, don’t expect technology stocks to match 2023’s blowout gains, but the year’s performance is no fluke. In fact, many portfolio managers anticipate another rosy year for the sector as rates fall, sentiment improves, AI matures, and investors hunt for growth. AI stocks may dominate tech-focused investing, but don’t sleep on the other emerging themes. What’s in store for AI and the megacaps? When asked about the biggest 2023 tech theme, most investors don’t hesitate to say artificial intelligence. And portfolio managers don’t expect that trend to lose any steam in the new year as the giants aggressively funnel money into new businesses and initiatives. “It is business oxygen,” said David Waddell, chief investment strategist at Waddell & Associates. “Everybody’s got to breathe it or you’re just going to die, so you better get on the train.” AI may only be in its early stages, but the groundbreaking technological innovation is already off to an exhilarating start. Heavyweights Alphabet and Microsoft fought for the top AI chatbot in 2023. Many ruled that Microsoft may have won the initial match but cautioned ruling Alphabet out . Both companies rallied more than 55% each. GOOGL YTD mountain Alphabet shares in 2023 Both companies have rolled out new initiatives in the months since. That includes Alphabet’s Gemini , and Microsoft’s Copilot tool , which adds AI capabilities to its Office 365 suite. How Microsoft’s Copilot sells could be a big tell as to whether AI is truly ready to move beyond the large language model training stage, said tech investor Paul Meeks. Even so, training large language models will continue to be key in 2024, with the trend favoring hyperscalers Microsoft, Alphabet, Amazon and Oracle , and data networking infrastructure provider Arista Networks . The latter has gained 94% in 2023. Meanwhile, Deepwater Asset Management’s Gene Munster regards Alphabet’s latest Gemini model as a potential asset for the company’s search business and engagement. The 2024 election cycle could prove another major boon for megacaps Meta Platforms , Alphabet and Amazon as candidates and companies increase advertising spending to capture voters, Meeks added. META YTD mountain Performace on Meta Platforms in 2023 Although megacap tech underperformed the broader market in recent weeks, the group may have more room to grow in the new year, Morgan Stanley Investment Management’s Andrew Slimmon said, dismissing concerns that significant 2023 run deems the stocks unattractive. In fact, many on Wall Street seem to agree with that notion. The consensus target for Meta implies 8% upside for shares after nearly tripling this year. For Microsoft and Amazon expect a potential 11% and 18% rally for shares, analysts predict, according to FactSet. “They’re certainly up a lot this year, but they got hit pretty hard last year,” Slimmon told CNBC’s ” The Exchange ” this month, noting that many sit below levels seen at the end of 2021. “That’s another reason why I think there’s more fuel in the tank for these stocks going into next year.” Other chipmakers could play catch-up Even after a blowout year, the run for Nvidia may be far from over. In fact, Wall Street’s current price target implies another 35% upside for shares. Despite 2023’s 239% gain and concerns that investors may be getting too over their skis, shares look “reasonably valued” when looking at next year’s earnings and Nvidia’s growth rate, Meeks said. NVDA YTD mountain Nvidia shares have more than tripled this year Even on a price-to-earnings basis shares look cheaper than they did a year ago, with the chipmaker trading at about 25 times earnings over the next 12 months, versus about 34 times at the end of December 2022. Over the last two years, Nvidia’s seen its PE climb as high as more than 62 times. While the AI chip darling may continue to knock Wall Street’s expectations out of the park as it has in recent quarters, investors shouldn’t overlook other buying opportunities. Advanced Micro Devices and customized server maker Super Micro Computer round out Meeks’ AI picks. The stocks have rallied 128% and 246%, respectively, this year. He’s also betting on Dell and Hewlett Packard Enterprises as companies search for PCs with updated capabilities. Both Meeks and Mahoney Asset Management’s Ken Mahoney point to Broadcom as another chipmaker to own. It’s one that many investors have shied away from given its daunting $1,116 sticker price. Year to date, the stock has doubled, jumping from a sub-$600 at the end of 2022. AVGO YTD mountain Broadcom share performance in 2023 Mahoney said the price of the stock doesn’t matter, and investors should instead focus on the percentage move up and down. “Broadcom is one of those that should be in ‘The Magnificent Seven,’ is not a household name, but certainly it is in the chipmaking space,” Mahoney said. “It’s in the AI space, and it’s been on one heck of a move.” Arm Holdings made headlines this year as one of the first major companies to go public , reviving the IPO market after a roughly two-year drought. The British chip company struggled at the outset, falling below its initial price of $51 a share, before rallying to $75.14 a share as of Friday’s close. Mahoney regards Arm as another overlooked beneficiary of the AI boom in the chipmaking industry. Last week, Micron Technology blew away investors with a strong quarterly print and guidance that signaled a continued recovery in the memory chip market, due in part to AI demand. According to Brandes Investment Partners’ Brent Fredberg, some investors may be underestimating how “memory hungry” AI truly is, and that should prove a major tailwind for dynamic random access memory companies including Micron and Samsung. Elsewhere, Munster’s begun betting on chip supplier Taiwan Semiconductor Manufacturing , on a hunch it will run-up on the AI tailwinds. Spotlight shifts to software, security 2023 saw a slew of cyberattacks and data breaches hit major companies from Clorox to MGM Resorts and Johnson Controls . Identity management provider Okta has fallen victim to a slew of breaches in recent years, disclosing a hack in October that pressured shares and wiped out more than $2 billion in market cap. Expect these crimes to get more sophisticated as AI prowess grows, said UBS Asset Management’s Albert Tsuei. While the trend may be a major headache for companies and consumers, it could prove a major positive for cloud and cybersecurity companies offering tools to clap back. The need to fortify defense systems against attacks, while making up for labor shortages in technical talent through automated routines, puts Palo Alto Networks in a favorable position for 2024, Tsuei said. PANW YTD mountain Stock performance in 2023 Meanwhile, to accommodate a range of cyber needs, William Blair’s Jonathan Vo expects companies to hunt for all-in-one solutions available. He also likes Palo Alto Networks as well as other large players such as Crowdstrike and Microsoft. Both Palo Alto and Crowdstrike have more than doubled this year. After a rough patch, software stocks across the board may finally be due for an inflection from rock bottom in the new year. In its upgrade of Salesforce , Morgan Stanley highlighted a “bridge to better growth” for the software behemoth in the new year — as AI becomes a growth engine for the company. Across the board, Morgan Stanley expects software as on the “precipice of the largest innovation cycle in decades.” Salesforce shares have just about doubled this year, but the firm’s $350 price target implying about 33% upside from Friday’s close. “Software’s secular dominance remains firmly intact,” wrote analyst Keith Weiss in a December note. “Add in improving IT budgets and room for margins, and the sector should continue to be best positioned in ’24.” That’s one of the reasons Tsuei pointed to Salesforce as an “underrecognized” AI opportunity often overshadowed by more alluring megacap winners. Hubspot is similar but caters to small- and medium-sized companies, Tsuei added. He expects improving IT budgets and a general recovery in spending to assist the software space as companies will need to shell out on the infrastructure needed to prepare data for harvesting in an AI world. “This is an area where advantage tends to compound over time,” he said. “Certainly, there is going to be room for other companies to participate in this.”
