The AI-driven market rally is navigating a big selloff amid weak US jobs and Q2 earnings reports, rising geopolitical tensions that threaten global supply chains, and a lack of clarity on how massive investments in AI translate to profit for investors and end-users. It is natural for investors who witnessed over 700% gains from just Nvidia shares since 2022 to grow restless when companies like Alphabet and Amazon spend tens of billions of dollars on AI with relatively no revenue to show for it.
Furthermore, industry experts are also concerned that tech giants are launching new AI products too fast for customers to keep up and understand. However, the new technology will likely take time to mature and fit into business models across industries to deliver high workflow efficiency and accuracy. According to Forrester principal analyst Christopher Gilchrist, AI giants like Microsoft and Google could start making significant cash on their AI sales in the next three years.
Navigating The AI Selloff
Revenues from AI segments could take some time to reflect in investor gains, which doesn't bode well for the growing base of restless investors. Moreover, the ongoing price correction could also be the beginning of a broader market downturn, making it crucial for investors to remain calm.
Tech companies have remained highly overvalued on the AI hype for over a year, and a price correction isn't exactly unprecedented. While companies like Amazon and Intel posted lacklustre Q2 earnings results that markedly dragged down share prices, they remain flexible to internal restructuring and continue to see high demand and adoption of their AI software services and chipsets. Meanwhile, investors betting on the long-term AI play can leverage the market upheaval using the dollar-cost averaging (DCA) strategy. During a market crash, DCA would entail spreading your stock-buying activity on the way down over regular intervals to lower your average buying price per share. It also helps investors avoid poorly timed lump sum investments at a higher price, thus reducing the overall impact of volatility on portfolios.
Ensure Income From AI Stocks Through Dividends
Nvidia has been leading the market rally on the back of its new-gen AI GPUs, offering massive gains for investors. However, the stock has declined by over 20% in the past month to trade below $100 per share as of writing this article. Meanwhile, the potential of similar future gains in a short span has been impacted in recent months as concerns grow around how investors' money goes into AI R&D and when they can realise returns from the segment. Investors looking to generate returns from AI investments can consider deriving an income stream from several AI players that return capital to shareholders as dividends. While Nvidia hiked its dividend payout by 150% to $0.01 per share in Q1, it is lower than several other dividend-paying AI stocks, one of which is catching up fast with Nvidia.
1. Broadcom
Broadcom announced a Q1 quarterly dividend of $5.25 per share and has increased dividends at a compounded annual growth rate of 35% since FY 2016. The company is deemed the top AI player after Nvidia, specialising in manufacturing AI chips and Ethernet switches vital to data centres. It also played a crucial role in the 5G infrastructure rollout and acquired VMWare in a $61 billion deal last year to improve its footprint in the software space. The acquisition is already contributing significantly to Broadcom's bottom and toplines. The company's 43% year-over-year revenue jump to $12.48 billion for the quarter ended May 5 was led by AI product sales that alone brought in $3.1 billion.
The company injected more than $3 billion into building AI ASIC (application-specific integrated circuits) with Meta and Alphabet and continues to witness high demand for semiconductor products and AI solutions, which probably led management to hike FY 2024 revenue guidance to $51 billion. The AI evolution would require a denser 5G infrastructure and switches for fast data transmission. Broadcom has the most extensive portfolio of broadband chips and networking switches used by data centres and enterprises building AI infrastructure. Broadcom stocks jumped over 200% during the AI frenzy but corrected nearly 20% since late June as the overall Nasadaq benchmark slipped. With a diverse portfolio not limited to AI, Broadcom is well-positioned to boost earnings as management remains steadfast in improving dividend yields.
2. Microsoft
Microsoft has hiked its dividend payouts consistently since FY 2013. In June, the tech giant announced a quarterly dividend of $0.75 for FY 2024. However, the stock price has declined by over 14% in the past month to under $400 apiece amid multiple global Microsoft Azure outages, resulting in massive losses for businesses worldwide. Despite mounting concerns, the company's balance sheet recorded double-digit revenue growth in commercial and business products, personal computing, and the Intelligent Cloud segment for the quarter ended in June. Microsoft returned $8.4 billion to shareholders via share buyback and quarterly dividends.
The OpenAI investor is an all-around AI play. During the quarter, it announced a host of AI products across verticals, such as a new category of Windows AI PCs called Copilot+ PCs that support 40 trillion operations per second to support multi-tasking at breakneck speeds and offer the latest AI tools to boost productivity. Meanwhile, Microsoft also launched the GenAI-powered Microsoft Copilot for Security for enhanced threat detection and the Azure ND MI300X v5 Virtual Machines, which are the first in the cloud to feature the AMD MI300X Instinct Accelerators for faster AI training with fewer GPUs. It also rolled out the Azure AI Studio for app developers to speed up the GenAI app development lifecycle for safe and faster deployment. Microsoft shares trade at much cheaper valuations than Nvidia or Broadcom and could be a value buy as it focuses on mission-critical industry needs at scale.
While these dividend yields aren't yet comparable to dividend aristocrats, these tech firms have showcased a willingness to return capital to shareholders. They are also poised to grow earnings as AI technology matures over the following years, which can pave the way for higher dividend payouts and capital gains for investors.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.
