Our theme of Internet Infrastructure Stocks – which includes a diverse set of companies that sell hardware and software that underpin the Internet — has done well this year, rising by a solid 50% year-to-date, outperforming the S&P 500 which gained about 20% over the same period. This follows a tough 2022, which saw the theme decline by 39% over the year.
Although data center spending was expected to be somewhat muted this year, with public cloud majors streamlining the sizable infrastructure investments they made through Covid-19 while contending with a potential economic slowdown, the industry is buzzing once again driven by the enthusiasm surrounding generative artificial intelligence, which essentially uses machine learning models to produce original and creative content and outputs. Now, AI workloads are computationally very heavy and this will drive demand for accelerated computing chips and GPUs sold by the likes of Nvidia and AMD. Moreover, memory manufacturers are also expected to see demand rise for faster, higher-density chips. Separately, the supply chain snarls, which proved to be a constraint for much of the technology industry through 2021 and 2022, are also easing, and this could potentially help revenue growth for companies such as Cisco, who saw their hardware businesses weighed down in recent years.
Will the gains continue? While the structural shift toward greater digitization will drive the theme in the long run, valuations are also rising, making the risk-to-reward tradeoff a bit less attractive for the near term. Within our theme, Nvidia stock has been the strongest performer, rising by almost 2.2x year-to-date, as the company sees sales of its graphics processing units surge, driven by demand from the AI space. Micron stock has also fared reasonably well, rising by about 41% year-to-date. On the other side, Juniper Networks
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