What’s Driving The Surge In Digital Infrastructure Stocks?

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 about 41% year-to-date, outperforming the S&P 500 which gained about 16% over the same period. This follows a tough 2022, which saw the theme decline by 39%. While data center spending was expected to be somewhat muted this year, as major cloud players such as Amazon
AMZN
and Microsoft
MSFT
look to streamline the sizable infrastructure investments they made through Covid-19, while contending with a cooling economy, the industry is buzzing once again thanks to the enthusiasm surrounding generative AI, which essentially uses machine learning models to produce original and creative content and outputs. Now AI workloads are computationally very heavy and this is likely to drive demand for accelerated computing and memory chips sold by the likes of Nvidia and Micron. Separately, supply chain issues, which proved to be a constraint for much of the industry through 2021 and 2022, are also easing, and this could potentially help revenue growth for the stocks in our theme. Networking stocks are also likely to benefit from the higher deployment of 5G services in emerging markets.

Within our theme, Nvidia stock has been the strongest performer, rising by over 190% year-to-date, as the company sees sales of its graphics processing units surge driven by demand from the generative AI space. Micron stock has also fared reasonably well, rising by about 27% year-to-date, driven by the AI trend and some optimism that DRAM memory prices, which have been on the decline, are finally bottoming out. On the other side, Juniper Networks
JNPR
stock has fared worse than the other stocks in our theme, declining by about 2% year-to-date.

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