3 Reasons AI Stocks are Primed for a Rebound

Although AI stocks have been highly volatile over the past two months, they likely aren’t finished moving higher. Below are three reasons why:

The Situational Awareness Saga is Over

Last month, momentum stocks, particularly AI stocks, suffered one their worst drawdowns in history. Situational Awareness, one of the newest and hottest hedge funds, got caught on the wrong side of long trades in leading AI-related stocks like Bloom Energy (BE) and Micron (MU) with extreme leverage. The fund, up a staggering 439% in the first half of the year due to 4x leverage, dropped nearly 70% in July, leading to a record $35 billion in losses.

To stay solvent after steep losses, Situational Awareness sold its entire public book to Wall Street kingpin Citadel for over $4 billion. A handful of days later, Citadel sold its Situational Awareness positions for a massive profit. The Citadel sales likely explain the recent volatility an weakness in AI stocks.

NVIDIA Earnings Loom

Zacks Rank #2 (Buy) stock NVIDIA (NVDA) is the largest company in the world and the most important in the leading artificial intelligence industry. Wednesday, NVIDIA will report earnings after the market close. In recent quarters, NVIDIA has released earnings growth that is unprecedented for a company of its size. However, according to the latest hyperscaler capital expenditure estimates, NVIDIA’s growth curve may gain even more momentum. CAPEX spending is expected to surge to more than $1 trillion over the next few years. According to UBS (UBS), CAPEX spending will surge 60% by 2028. That’s good news for NVIDIA, which captures roughly 39% of every hyperscaler dollar spent.

Meanwhile, despite its high double-digit top-and bottom-line growth rate, NVIDIA remains surprisingly cheap with a P/E ratio of just 35.70x.

AI is a Gamechanger for the Biotech Sector

Until recently, most investors AI mostly benefited AI-centric stocks. That said, AI’s positive impact is finally being seen across sectors. Last week, Moderna (MRNA) announced that its personalized melanoma cancer therapy succeeded in a 1,137-patient Phase 3 trial. However, the Phase 3 win is much more than a biotech story. The Moderna data shows that AI computation allowed Moderna to personalize the medicine, making it far more effective than legacy biotech drugs. Moderna shares jumped 176% on the news. The Moderna news is likely just the tip of the iceberg.

Bottom Line

While recent market turbulence tested momentum, the washout of extreme leverage combined with surging multi-year infrastructure spending and real-world biotech breakthroughs means the AI rally is far from over.

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This article originally published on Zacks Investment Research (zacks.com).

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