Long-Term Play: How AVGO's Focus on Artificial Intelligence Drives Growth

Broadcom Inc. (AVGO), a global tech leader that develops and supplies semiconductor and infrastructure software solutions, exceeded analysts’ expectations for both revenue and earnings in the first quarter of fiscal year 2024. Its revenue and EPS came in at $11.96 billion and $10.99, surpassing the analysts’ estimates of $11.72 billion and $10.42, respectively.

For the quarter that ended February 4, 2024, the company’s net revenue witnessed a 34.2% increase year-over-year. The revenue increase was primarily driven by AVGO’s acquisition of VMware in November 2023, which accelerated growth in its infrastructure software segment. Also, the company saw a high demand for its networking products, particularly in AI data centers and custom AI accelerators from hyperscalers.

AVGO’s first-quarter non-GAAP net income and non-GAAP earnings per common share rose 17.2% and 6.4% from the prior year’s period to $5.25 billion and $10.99, respectively. Furthermore, the company’s adjusted EBITDA grew 26% from the year-ago value to $7.16 billion.

Broadcom’s fiscal 2024 software revenue guidance is set at an impressive $20 billion. Additionally, fueled by the sustained robust demand for AI NAND, the company anticipates networking revenue to exceed 35% year-on-year growth, surpassing its early projection of 30% annual growth.

Moreover, it projects moderate to strong single-digit percentage year-over-year growth in its Semiconductor Solutions division for fiscal 2024. AVGO has reiterated its consolidated revenue target of $50 billion, representing a 40% increase year-over-year. It has also reiterated its adjusted EBITDA forecast of $30 billion for the year, a 60% growth rate.

In addition, Streets expects Broadcom’s revenue and earnings per share for the second quarter of fiscal 2024, ending April 2024, to rise by 37.3% and 4.9% to $11.99 billion and $10.82, respectively.

Several Cutting-Edge Innovations and Breakthroughs

On March 14, 2024, AVGO launched Bailly, the industry's first groundbreaking 51.2 Tbps CPO Ethernet switch. The innovation would allow hyperscalers to establish energy-efficient and cost-effective large-scale AI and computing clusters.

AVGO’s technology leadership and manufacturing innovations will ensure that Bailly delivers 70% better power efficiency and an optical I/O roadmap that aligns with the future bandwidth and power needs of AI infrastructure.

Furthermore, the tech company’s March 13 announcements showcased vital advancements extending its market leadership with an expanded portfolio of optical interconnect solutions for AI and ML applications. The cutting-edge optics support high-speed data transfers in large-scale generative AI compute clusters, connecting front-end and back-end networks.

Key achievements unveiled by Broadcom include the production release of 200-Gbps per lane electro-absorption modulated laser (EML) to pair with next-gen GPUs, the demonstration of the industry’s first 200G/lane vertical-cavity surface-emitting laser (VCSEL), and the shipment of over 20 million channels of 100G/lane high-speed optical components used in AI/ML systems.

Moreover, AVGO showcased the continuous wave (CW) laser with high efficiency and high linearity for silicon photonics (SiPh) modulation at 200G. These breakthroughs will revolutionize high-speed interconnects within AI clusters, facilitating front-end and back-end generative AI compute networks.

“Generative AI has unleashed a network transformation necessitating an order of magnitude increase in high-speed optical links compared to standard network requirements,” said Near Margalit, vice president and general manager of the Optical Systems Division at AVGO. “We will continue to invest in VCSEL, EML and CW laser technologies to deliver disruptive innovation in bandwidth, power and latency for optical interconnects in next generation AI links.”

According to Dr. Vladimir Kozlov, founder and CEO of LightCounting Market Research, Alphabet Inc. (GOOGL) and NVIDIA Corporation (NVDA) will lead the way as the initial adopters of 200G per lane optics for linking GPUs and TPUs in AI clusters, which is currently a highly sought-after segment in the market.

Kozlov added that Broadcom, known for pioneering innovative components, is once again at the forefront by supplying the necessary technology for the next generation of optical transceivers, supporting the rapid evolution of AI infrastructure.

“NVIDIA is at the forefront of photonics innovation, and Broadcom has been an important optical-component partner, matching the pace and scale required as we advance our HPC and AI optical-interconnect technology,” said Craig Thompson, vice president of LinkX products at NVDA. 

At Innolight, we have been deploying leading-edge optical interconnect solutions for AI, ML and HPC applications,” stated Osa Mok, CMO at Innolight Technology. “We are excited to continue our partnership with Broadcom to develop advanced terabit optical modules for generative AI, enabling AI clusters to scale and support the next generation of LLMs.”

Also, Sean Davies, vice president of sales at Eoptolink Technology, said, “We are excited to partner with Broadcom to bring to market state-of-the-art solutions to enable terabit connectivity and drive new generative AI architectures.”

Dividend Growth Trajectory

AVGO recently declared a quarterly dividend of $5.25 per share, payable on March 29, 2024, to shareholders on record as of March 21, 2024. This increase brings the annual dividend to $21 per share. The company has increased its dividends for 13 consecutive years.

Moreover, over the past five years, the company’s dividend payouts have grown at a CAGR of 19.3%. AVGO’s annual dividend translates to a yield of 1.70% at the prevailing stock price.

The company's strong financial performance and success in the AI chips market, along with synergies from a recent merger, suggest ongoing earnings growth, which supports the potential for future dividend increases.

Valuation Concerns

While all seems well, AVGO's substantial surge over the past year has led to a lofty valuation. Its forward P/E ratio stands at 61.45x, 118.2% higher than the industry average of 28.16x. Likewise, the stock’s forward EV/Sales and forward Price/Sales of 12.68x and 11.41x are 337.4% and 295.7% higher than the industry averages of 2.90x and 2.88x, respectively.

Thus, buying shares of AVGO at the moment might not be the best investment decision. However, one could closely monitor this stock as its strong AI business could drive significant growth in the future.

Favorable Analyst Estimates

Citigroup (C) analyst Christopher Danely strongly recommends buying AVGO stock, with a price target of $1,100. The upgrade is based on the company's solid core business performance and the positive impact expected from its VMware acquisition after the release of its fourth quarter and fiscal year 2023 earnings.

AVGO’s impressive financial results, particularly the contributions from AI, played a key role in this decision. Notably, the management has significantly increased its AI spending target from $4 billion in 2023 to more than $8 billion in 2024.

Currently, 86.7% of top-rated analysts rate AVGO as a Strong Buy or Buy, while 13.3% consider it a Hold. None suggest selling the stock. Analysts forecast AVGO’s upcoming year to yield earnings per share of $39.68, marking an 18.5% year-over-year increase if predictions hold true.

Bottom Line

AVGO’s impact on global connectivity is profound. The semiconductor giant supplies chips for virtually all internet-connected devices and is evolving into a software solutions provider for businesses. Broadcom has been primarily benefiting from the robust adoption of AI. The stock has gained more than 45% over the past six months and around 97% over the past year.

During the first quarter of fiscal 2024, the company’s AI revenues under its semiconductor segment quadrupled year-over-year to $2.30 billion. Further, AVGO projects fiscal 2024 AI revenues of nearly $10 billion, higher than the prior guidance of $7.50 billion and account for about 35% of semiconductor revenues, up from previous guidance of 25%.

AVGO recently announced key accomplishments, extending its market leadership with an expanded portfolio of optical interconnect solutions for AI and ML applications. These developments signify significant progress in incorporating state-of-the-art optical technologies into the constantly shifting realm of AI infrastructure.

The collaboration between Broadcom and key industry leaders like NVIDIA, Innolight Technology, and Eoptolink Technology further highlights the cooperative approach toward advancing AI/ML optical transceiver technologies. This joint endeavor seeks to meet the increasing need for larger AI clusters while fostering innovation in generative AI architectures.

Despite its high valuation, the company boasts strong business fundamentals and prospects amid emerging AI capabilities, making it a reliable long-term investment option.

Intel’s Stock Outlook: AI Growth vs. Regulatory Risks

The enthusiasm surrounding artificial intelligence (AI) ever since the debut of ChatGPT in November 2022 is still in full swing, rapidly engulfing various industries. This relentless wave of innovation is reshaping the technological landscape, with tech giants racing to develop cutting-edge generative AI models to meet escalating demands.

Among the beneficiaries of this AI boom, the semiconductor industry finds itself in an enviable spot, poised to capitalize on the surging need for AI chips capable of powering generative AI models. With the AI revolution continuing to gain momentum, chip giant Intel Corporation (INTC) is strategically positioning itself to harness this wave of transformation.

Despite most of last year’s AI frenzy being indebted to NVIDIA Corporation (NVDA), thanks to its GPUs powering prominent AI models, such as ChatGPT, INTC is determined not to lag behind either.

Last year, INTC introduced Gaudi3, an AI chip tailored for generative AI software. Expected to debut this year, Gaudi3 will join the competition against NVDA’s H100, a popular option for companies constructing extensive chip farms to drive AI applications, and Advanced Micro Devices, Inc.’s (AMD) upcoming MI300X, slated to begin shipping to customers in 2024.

In addition to Gaudi3, INTC unveiled Core Ultra chips tailored for Windows laptops and PCs alongside new fifth-generation Xeon server chips. Notably, both chip variants feature a dedicated AI component known as an NPU, enhancing the capability to execute AI programs more swiftly.

This strategic move also serves as a signal to investors regarding the potential for increased demand for their chips in the AI-driven landscape.

Furthermore, in a recent move, INTC unveiled a range of new platforms, solutions, and services encompassing network and edge AI, Intel® Core™ Ultra processors, the AI PC, and beyond. This initiative aims to enhance total cost of ownership (TCO) and operational efficiency while ushering in fresh innovations and services.

In this modern era, where staying competitive necessitates embracing technological advancements, INTC is rolling out products and solutions to enable its customers, partners, and vast ecosystems to seize the emerging opportunities presented by AI and integrated automation.

With the demand for chips that fuel generative AI models soaring all across the globe, industry giants like INTC, AMD, and NVDA are engaging in fierce competition to deliver cutting-edge AI chips, surpassing escalating performance expectations.

However, the ambitious expansion plans of these major chip giants met with hurdles last year in October when the Biden administration implemented measures to restrict the types of semiconductors that American companies can sell to China.

U.S. Commerce Secretary Gina Raimondo emphasized the administration's commitment to safeguarding national security by limiting access to critical technologies, rigorously enforcing regulations, and minimizing unintended impacts on trade flows.

Nevertheless, INTC bypassed export restrictions by supplying chips worth hundreds of millions of dollars to the heavily sanctioned Chinese tech and telecom companies in Huawei. This move, which allowed INTC to furnish Huawei with chips for laptop use, has sparked criticism from its competitor, AMD.

INTC’s chip sales to Huawei notably surged between 2020 and 2023, while AMD's sales witnessed a decline.

This discrepancy arose from the United States Department of Commerce granting special permissions to select American suppliers of Huawei, including INTC, to sell specific items to the company in 2020. However, AMD's efforts to secure a license to sell similar chips under President Joe Biden's administration went unanswered.

On the other hand, despite bypassing restrictions to sell chips to Huawei, INTC experienced a decline in overall sales in China in 2023 due to the export ban. China holds significant importance for INTC, with revenue from billings to the country constituting 27% of its total sales.

Last year, INTC generated a total of $14.85 billion of its revenue in China, marking a year-over-year decline of more than 13%.

Meanwhile, both AMD and NVDA witnessed a notable decline in sales to China, surpassing that of INTC as a result of the stringent export control regulations imposed by the U.S. government.

Moreover, there is a growing likelihood that INTC could encounter comparable restrictions to those faced by AMD and NVDA. This stems from mounting pressure on President Biden to revoke the license granted by the Trump administration, permitting INTC to continue chip supplies to Huawei.

Bottom Line

With shares roughly up more than 50% over the past year, INTC has successfully capitalized on the AI tailwinds. Despite challenges, including export restrictions and intensifying competition, INTC remains committed to innovation and expansion in the AI chip market.

According to Gartner, Intel holds the top position as the largest semiconductor maker by revenue in 2023 despite having a market cap that ranks below NVDA and AMD. The company’s fourth-quarter results witnessed a 9.7% year-over-year rise in its topline figure, reaching $15.41 billion. Its net income stood at $2.67 billion versus a net loss of $664 million in the prior year’s quarter.

Pat Gelsinger, CEO of INTC, remarked that the company achieved robust fourth-quarter results, surpassing expectations for the fourth consecutive quarter, with revenue reaching the higher end of their guidance.

Furthermore, he emphasized INTC’s commitment to advancing its mission of making AI technology accessible across various sectors while generating long-term value for stakeholders.

The stock also appears quite reasonably priced compared to its industry peers. For instance, INTC’s non-GAAP price-to-earnings (P/E) ratio of 31.21x is lower than NVDA’s 35.62x and AMD’s 52.36x, respectively.

However, despite its commendable efforts and dedication to capture the global AI chip market, there is an increasing possibility that INTC may encounter similar restrictions as those faced by AMD and NVDA.

This adds uncertainty to Intel’s prospects, particularly as its competitor NVDA plans to initiate mass production of a downgraded version of its AI chips specifically designed for China in the second quarter of 2024 to comply with U.S. export regulations.

In conclusion, while INTC has made significant strides in the AI chip sector and boasts solid fundamentals, the looming regulatory challenges pose a risk to its growth trajectory. Therefore, investors could carefully monitor the stock for now and wait for a better entry point.

Is NVDA Stock Headed for a Correction?

NVIDIA Corporation (NVDA) has undeniably emerged as a powerhouse in the world of chips, riding high on the wave of the Artificial Intelligence (AI) frenzy. The stock’s remarkable rally of roughly 296% over the past year, propelled by skyrocketing demand for its chips essential to train generative AI models, has fueled its trajectory.

This rapid surge positioned NVDA as the third most valuable company in the world, trailing closely behind tech titans such as Microsoft Corporation (MSFT) and Apple Inc. (AAPL).

With the entire stock market captivated by NVDA’s dramatic ascent and retail investor participation reaching unprecedented levels, Goldman Sachs analysts even went as far as to label NVDA as the “most important stock on planet Earth” ahead of its fourth-quarter earnings call.

But Why Is NVDA Deemed so Important?

In 2023, NVDA witnessed a seismic shift in its trajectory. While previously acclaimed for pioneering cutting-edge computer chip technology, particularly in enhancing graphics-heavy video games, the emergence of AI swiftly boosted these chips to newfound prominence.

The H100, crafted by NVDA, stands as a pinnacle of graphics processing unit (GPU). Tailored exclusively for AI applications, it reigns as the most potent GPU chip available. With an astonishing 80 billion transistors, six times more than its predecessor, the A100 chip, the H100 accelerates data processing to unprecedented speeds, solidifying its position as the unparalleled leader in GPU performance for AI tasks.

The H100’s exceptional performance and capacity to turbocharge AI applications have sparked significant demand, leading to a shortage of these coveted chips. On the other hand, despite the limited availability of the H100, NVDA has already unveiled its successor, the GH200.

Anticipated to surpass the H100 in power and performance, the GH200 is slated to be released by the second quarter of this year.

As the demand for innovative generative AI models soars, major tech players are entering the AI arena, designing their very own generative AI models to boost productivity. Thus, NVDA’s AI chips play a vital role in training and operating these generative AI models.

Moreover, with NVDA’s dominant hold of more than 80% of the global GPU chip market, tech giants find themselves heavily reliant on NVDA to fuel the prowess of their generative AI creations.

Despite such solid demand for NVDA’s offerings, Cathie Wood, the head of ARK Investment Management, pointed out that the GPU shortages, which surged last year alongside the increasing popularity of AI tools like ChatGPT, are now starting to ease.

She highlighted that lead times for GPUs, specifically those manufactured by NVDA, have notably reduced from around eight to 11 months to a mere three to four months. With the possibility of double and triple ordering amid widespread apprehensions about GPU shortages, Wood believes that NVDA might face the pressure of managing surplus inventories.

Consequently, Wood’s concerns over excess inventory spark a pivotal question: Is NVDA headed for a correction?

In response to the rising popularity of AI tools last year and heightened demand for its AI chips among tech companies, NVDA has tried to expand its GPU facilities, which is evident from the launch of GH200 this year.

In addition, NVIDIA’s Chief Financial Officer, Colette Kress, underscored the company’s efforts to enhance the supply of its AI GPUs, indicating a commitment to meet growing market demands.

Buoyed by its heavy dominance in the GPU market, the company posted solid fourth-quarter results, which further fueled the stock’s trajectory. Its revenue increased 265.3% year-over-year, reaching $22.10 billion. Meanwhile, the company’s bottom line hit $12.29 billion, marking a staggering growth of 769% from the prior-year quarter.

However, NVDA didn’t experience such remarkable growth in its smaller businesses. Specifically, its automotive division saw a decline of 4%, totaling $281 million in sales. Conversely, its OEM and miscellaneous business, encompassing crypto chips, demonstrated a modest 7% increase, reaching $90 million.

Barclays research analyst Sandeep Gupta anticipates that demand for AI chips will stabilize once the initial training phase concludes. Gupta emphasizes that during the inference stage, computational requirements are lower compared to training, indicating that high-performance personal computers and smartphones could potentially meet the needs of local inference tasks.

As a result, this situation might diminish the necessity for NVDA to expand its GPU facilities further. With that being said, Wood’s observation about the potential for a correction in NVDA was validated when its shares plummeted last week after a robust year-to-date rally.

In addition, Wall Street analysts are ringing the caution bells as the stock reaches dizzying heights, suggesting that the AI market darling could face headwinds ahead, with expectations of slowing growth and fiercer competition.

Bottom Line

NVDA has solidified its position as a dominant player in the chip industry, primarily driven by the surge in demand for its AI chips. The company’s remarkable growth has been propelled by its cutting-edge technology and market leadership, positioning it as one of the most valuable companies globally.

However, the company’s heavy reliance on AI chip demand poses a potential risk, as any fluctuations or slowdowns in the AI market could significantly impact NVDA’s profitability and growth prospects.

Furthermore, NVDA’s shares are trading at a much higher valuation than industry norms. For instance, in terms of forward Price/Sales, NVDA is trading at 20.23x, 590.8% higher than the industry average of 2.93x. Likewise, NVDA’s forward Price/Book ratio of 25.89 is 493.7% higher than the 4.36x industry average.

The stock’s alarming valuation compared to its industry peers indicates investor confidence in NVDA's future growth potential, leading it to be willing to pay a premium price for its shares.

However, it also signals that NVDA’s anticipated growth might already be factored into its stock price, potentially dimming its attractiveness. With analysts projecting AI chip demand to stabilize, investors might be overly optimistic about NVDA’s future growth potential.

Moreover, Cathie Wood’s concerns regarding a potential correction in NVIDIA were recently validated by a significant drop in the company’s shares last week. The chipmaker closed more than 5% lower last week, marking its most challenging session since last May.

However, despite these uncertainties, NVDA’s growth potential may not have reached its peak yet, given the company’s ability to maintain its dominant position even in the face of stiff competition in the chip space. Therefore, adopting an entirely bearish outlook on the company’s shares might not be prudent.

Instead, investors could consider holding onto their positions, as there may still be opportunities for gains in the future.

Intel Backed Astera Labs Goes Public: What Investors Need to Know

In 2020, Intel Capital, the global investment arm of Intel Corporation (INTC), made a significant move by unveiling a momentous investment initiative of $132 million. This injection of funds fueled the growth of 11 cutting-edge technology startups, each driving innovation in Artificial Intelligence (AI), autonomous computing, and chip design.

Among these 11 disruptive startups, Astera Labs, Inc. emerged as a key player, ready to redefine connectivity solutions and spearhead transformative industry shifts. Established in 2017, Astera quickly made waves in the semiconductor realm with its state-of-the-art connectivity solutions tailored for AI and cloud applications.

Notably, last year, the chip startup made a significant announcement regarding its entire product portfolio. The company revealed that its products are now equipped to fast-track cloud-scale workloads with unprecedented scaling capabilities.

This development comes at a time when the global cloud AI market is projected to experience substantial growth. It is estimated to reach $647.61 billion by 2030, growing at an impressive CAGR of 39.6% from 2023 to 2030.

Astera’s innovative approach to data center connectivity, bridging accelerators, CPUs, GPUs, memory, and networking, is proving vital in supporting the expansion of cloud infrastructure for AI and data-driven applications at scale.

Thad Omura, SVP of Business and Corporate Development at Astera Labs, underscored the prowess of the company's hardware-optimized PCIe, CXL, and Ethernet connectivity portfolio. He emphasized that these solutions have been meticulously crafted with a software-defined approach, enabling them to deliver unprecedented scale for AI infrastructure and cloud connectivity.

Moreover, encouraged by the prevailing AI frenzy, the chip startup recently announced its plans to transition into a publicly traded entity, set to trade under the ticker symbol “ALAB” on NASDAQ.

The company is gearing up to offer 17.80 million shares priced between $27 and $30 each, aiming to raise to $534 million. Following the completion of the deal, there will be 150.50 million outstanding shares, potentially valuing the company at $4.50 billion at the upper end of that range.

Morgan Stanley and J.P. Morgan have taken on the role of lead joint book runners for this Initial Public Offering (IPO). Additionally, Barclays, Deutsche Bank Securities, Evercore ISI, and Jefferies are also serving as book runners. Meanwhile, Needham & Company, Stifel, Craig-Hallum Capital Group, Roth Capital Partners, Loop Capital Markets, and Siebert Williams Shank have stepped in as co-managers.

The funds raised from this IPO will be allocated towards working capital and general corporate purposes, with the potential for utilization in acquisitions if suitable opportunities emerge. In a letter included in the filing papers, the three founders of Astera, Jitendra Mohan, Sanjay Gajendra, and Casey Morrison, share their unwavering commitment to the transformative power of AI.

The three founders kickstarted their venture in a garage. Their brainchild, Astera Labs, birthed three product families, each tackling crucial bottlenecks in AI infrastructure.

Aries, designed to enhance CPUs and GPUs, facilitates the scaling of data input/output bandwidth. Taurus focuses on providing AI servers with accelerated network bandwidth. Meanwhile, Leo enables the seamless scaling of memory bandwidth and capacity for CPUs and GPUs.

Astera projects its total addressable market (TAM) to skyrocket to nearly $27.40 billion by 2027, up from approximately $17.20 billion in 2023. In addition, the company boasts an impressive clientele, counting chip industry giants like INTC, NVIDIA Corporation (NVDA), and Advanced Micro Devices, Inc. (AMD).

Riding the wave of strong chip demand, the company witnessed a solid year-over-year topline growth in fiscal year 2023. In its Form S-1 filing, Astera reported revenue of $115.79 million, marking a robust 44.9% year-over-year growth. The company also saw a notable uptick in its gross profit, climbing to $79.83 million from $58.68 million the previous year.

On the other hand, as a result of making substantial investments in the design and development of new products and platform enhancements, the company remains unprofitable in 2023, incurring a net loss of $26.26 million and $0.71 per share. Yet, this reflects an improvement compared to fiscal year 2022, where the net loss was $58.35 million and $1.71 per share.

Bottom Line

Astera Labs has positioned itself as a frontrunner in the semiconductor industry, driven by its innovative connectivity solutions tailored for AI and cloud applications.

Backed by a significant investment initiative from INTC and boasting impressive financial growth, the company’s transition into a publicly traded entity signifies its confidence in its products and growth potential.

Furthermore, Astera’s IPO announcement arrives amid a perfect storm of opportunity. With the demand for semiconductor chips, especially those powering AI applications, soaring to new heights, the stage is set for Astera's ascent. For instance, NVDA’s stock has surged dramatically, seemingly unstoppable in its ascent.

Meanwhile, the shares of AMD and Taiwan Semiconductor Manufacturing Company Ltd. (TSM) have also witnessed significant rises, reflecting the broader trend of robust demand for semiconductor chips.

That said, with a strategic focus on addressing critical bottlenecks in AI infrastructure and a solid client base, including industry giants, Astera is well-poised to capitalize on the booming demand for semiconductor chips. Despite remaining unprofitable in fiscal year 2023, the company’s continuous investments in product development reflect its commitment to unlocking AI's full potential.

Moreover, the funds infusion from the IPO will provide Astera with a substantial financial boost, empowering the company to enhance its operational capabilities and drive strategic growth initiatives.

Overall, Astera’s IPO represents a significant milestone in its journey toward becoming a major player in the semiconductor landscape, with promising prospects for future growth and expansion. Keeping all these factors in mind, Astera emerges as a strong investment candidate.

 

AMZN Enters the Dow: What It Means for Investors and the Market

The Dow Jones Industrial Average (DJIA), often referred to as the Dow, is one of the most enduring and esteemed price-weighted indices, overseeing 30 prominent publicly traded companies listed on both the NYSE and the NASDAQ.

Throughout its history, the Dow has functioned as a reliable gauge of the overall health of the U.S. stock market and economy. The companies featured in the Dow are often regarded as stalwarts in their respective industries.

However, over the past years, the absence of a few major tech giants within the index has led to its downfall. As the S&P 500 takes the lead, questions have been raised on Dow’s ability to correctly capture the essence of Artificial Intelligence’s (AI) impact on the U.S. economy.

In 2023, the Dow recorded a 13.7% increase, whereas the S&P 500 saw a 24.2% surge. Looking at year-to-date performance, the S&P 500 has risen by about 7%, compared to the Dow's increase of over 2%.

The performance gap between the indexes can be largely attributed to the S&P 500's heavier focus on big tech stocks, which have emerged as significant market winners. The anticipation surrounding the Federal Reserve's potential shift from rate hikes to cuts, coupled with the AI frenzy, propelled tech stocks to unprecedented heights last year.

Out of the few major big tech players, namely Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms, Inc. (META), Microsoft Corporation (MSFT), and NVIDIA Corporation (NVDA), only two tech titans MSFT and AAPL were included in the Dow up until last month.

However, considering the Dow’s lagging performance compared to the S&P 500 and its lack of exposure to big tech stocks, in a recent bold move to revitalize its performance and embrace the tech wave, Dow replaced pharmaceutical retailer Walgreens Boots Alliance, Inc. (WBA) with e-commerce giant, AMZN. Among the 30 blue chip companies listed in the Dow, AMZN holds the 17th position by weight.

But What Led to AMZN's Inclusion Into the Dow?

AMZN's inclusion in the Dow Jones index can be attributed to a three-for-one split implemented by Walmart, Inc. (WMT), also in the Dow. Companies within the Dow are weighted according to their stock price. Therefore, WMT's stock split, which effectively reduces its price and thereby its weight within the index, necessitated a rebalancing. Consequently, the Dow opted to incorporate AMZN into its listing.

S&P Dow Jones Indices indicates that this adjustment mirrors the evolving landscape of the American economy, which is expected to amplify consumer retail exposure alongside other business sectors within the Dow. Beyond AMZN's retail aspect, its addition to the Dow could elevate the index's performance, propelled by AMZN's increasing influence in the tech sector.

Commanding a market cap of over $1.80 trillion, AMZN has spread its wings across various industries over the past few years. While renowned for its remarkable retail operations, its substantial advancements in the entertainment landscape through Amazon Prime Video, Amazon Music, Prime Gaming, and Twitch underscore its versatility and impact.

Moreover, the company has also achieved notable progress in the tech space, particularly with its Amazon Web Services (AWS) segment, capitalizing on the surge in demand for Cloud and AI services. According to Statista, AWS generated $90.80 billion with its cloud services in 2023.

Additionally, buoyed by a record-breaking holiday shopping season, AMZN witnessed solid year-over-year growth in both its topline and bottom-line figures in the final quarter of 2023. Meanwhile, its AWS segment, which recorded a net sale of $24.20 billion, was more profitable than analysts had predicted and accounted for 14% of AMZN’s overall revenue in the same quarter.

With AMZN’s focus on fortifying its foothold in the realm of AI, the company, during the fourth quarter, launched the Q chatbot for developers and nontechnical corporate workers, alongside unveiling its partnership with chip kingpin NVDA to provide cutting-edge infrastructure, software, and services, aimed at supporting customers' advancements in generative AI.

On the earnings call, AMZN’s CEO Andy Jassy emphasized that generative AI remains a focal point for AMZN, with ongoing dedication and investment. He highlighted its potential to revolutionize numerous customer experiences and processes, foreseeing it as a significant driver of tens of billions of dollars in revenue for AMZN in the coming years.

Bottom Line

Despite the Dow lagging behind the S&P 500 index, inclusion in the Dow serves as a clear signal to investors, analysts, and the financial media, indicating a company's status as a stalwart of the American economy.

That being said, AMZN’s inclusion among the top 30 blue-chip companies comes as no surprise, considering the company’s strong financial prowess, relentless success, and diverse portfolio spanning retail, entertainment, and technology.

In addition, AMZN's robust financial performance in its last reported quarter, along with its recent partnerships with industry giants such as NVDA and product launches to fortify its position in the realm of AI, underscore its potential for further expansion and innovation.

Looking forward, Wall Street is buzzing with high expectations for the company’s fiscal first-quarter earnings, forecasting an impressive 11.9% year-over-year revenue climb to $142.48 billion, alongside a remarkable 171.6% year-over-year EPS surge to $0.84.

Furthermore, driven by AMZN’s competitive advantages, including its strong positions in logistics, e-commerce, and cloud computing, Wall Street projects the company to achieve revenue growth close to 10% by 2028. Street also anticipates slight increases in its EBITDA margin, reaching 21.2% by the end of 2028, and predicts AMNZ's market cap will reach $3 trillion over the next five years.

With such bullish sentiment echoed by analysts for the company’s future prospects coupled with its inclusion in the prestigious Dow index, institutional investors are flocking to AMZN shares, with 2,532 holders ramping up their stakes, reaching a total of 312,340,167 shares. Moreover, 428 institutions have taken new positions (32,292,371 shares).

This surge in institutional investment speaks volumes about the growing confidence in AMZN's future prospects. In light of all the encouraging aforementioned factors, AMZN emerges as a compelling investment opportunity.