Why Super Micro Computer, C3.ai, and Other Artificial Intelligence (AI) Stocks Rallied This Week
There’s little question that one of the prevailing forces that has been driving the market higher over the past year is the advancement of artificial intelligence (AI). Countering investors’ exuberance about the prospects for that technology are concerns about the Federal Reserve’s ongoing battle with inflation. Interest rates remain at a two-decade high, and investors are keenly interested in the timing and potential for the central bank to begin cutting them. The central bank has signaled that it’s in no rush to reduce the benchmark federal funds rate — at least, not until inflation subsides sufficiently. The government’s latest monthly read on inflation helped fuel investors’ hopes, sparking a broad-based market rally.
With that as a backdrop, AI server specialist Super Micro Computer (NASDAQ: SMCI), also called Supermicro, surged by 11.2% this week, AI solutions provider C3.ai (NYSE: AI) gained 10.5%, and data mining and analytics provider BigBear.ai (NYSE: BBAI) climbed 8.6%, according to data provided by S&P Global Market Intelligence.
A check of all the usual sources — regulatory filings, earnings results, and changes to analysts’ ratings and price targets — turned up nothing in the way of company-specific news that could have been driving these AI stocks higher this week. This seems to suggest that most investors who were propelling their climbs were giddy about the incremental improvements to the state of the U.S. economy.
Persistent and stubborn inflation
The latest monthly report on inflation, courtesy of the U.S. Bureau of Labor Statistics, showed price growth continuing to cool, a welcome development for weary consumers. The Consumer Price Index (CPI) — the most widely watched gauge of inflation — increased by 3.4% in April compared to the year-ago period while edging up just 0.3% month over month.
The year-over-year increase was in line with economists’ expectations, while the monthly increase was marginally better than the consensus estimate of 0.4%. The “core” inflation rate, which doesn’t include volatile food and energy prices, was up 3.6% compared to this time last year, and up 0.3% from March, both results in line with expectations.
The Fed’s target of 2% inflation remains elusive, but investors are celebrating the incremental improvements.
The underlying data shows that the Fed still has work to do. While energy prices rose just 1% compared to the year-ago period, shelter prices, primarily composed of rental rates, remained particularly troublesome, up 5.5%.
Inflation has remained stubbornly higher than the Fed’s target range over the past couple of months, which decreases the likelihood that it will begin to cut interest rates this year.
Now what
What does the broader read on inflation have to do with our trio of AI stocks? Businesses, like consumers, continue to feel the pinch of higher prices, which makes them less likely to take on additional obligations. Even incremental improvements in the big picture spark the hope among investors that businesses will be more willing to spend on new projects — like the adoption of AI tools to improve their operations. That, in turn, would benefit these three companies.
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Super Micro Computer makes high-end, AI-ready servers that are highly customizable and energy efficient.
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BigBear.ai’s data mining and decision intelligence solutions provide companies with information they can use to make better decisions.
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C3.ai provides turn-key AI solutions that help businesses adopt AI and quickly get AI-powered applications up and running.
There is, of course, the matter of valuation to consider. C3.ai, Supermicro, and BigBear.ai currently trade at 7 times, 2 times, and 2 times forward sales, respectively. Furthermore, C3.ai and BigBear.ai aren’t profitable, increasing the level of risk. That leaves Supermicro as my uncontested favorite of these three.
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Danny Vena has positions in Super Micro Computer. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
Why Super Micro Computer, C3.ai, and Other Artificial Intelligence (AI) Stocks Rallied This Week was originally published by The Motley Fool
