AI sell-off was a positioning reset, fundamentals remain strong, says Raymond James strategist

The recent sell-off in artificial intelligence (AI) stocks was driven more by a reset in investor positioning than a deterioration in business fundamentals, according to Matt Orton, chief market strategist at Raymond James Investment.

Despite the correction, semiconductor companies across graphics processing units, central processing units and memory have continued to report record numbers, beat estimates and raise their guidance.

Orton said the market's next move will depend partly on whether strong earnings translate into gains in share prices and how major technology companies balance their AI investments with free cash flow.

Results and capital expenditure plans from Alphabet, Microsoft and Amazon will be important in determining whether the market can sustain its momentum and move towards new all-time highs.

[faq type="interview" title="This is an edited transcript of the interview."][ques][/ques][ans][/ans][/faq][faq type="interview"][ques]Any thoughts on Jio Platforms? I was just going through some brokerages. Nomura says the once-disruptor is now the leader, with a target price of Rs 1,340. Domestic brokerage Motilal Oswal calls Jio Platforms the gateway to Digital India. Have you looked at the numbers?[/ques][ans]It's an exciting opportunity. We talked about Jio a little bit last week when we were first getting some of the details. The one challenge I have with respect to Jio is the premium it will trade at relative to other comparable companies, such as Bharti Airtel. But the flip side is that, when you look at the growth opportunities and the leverage on the balance sheet relative to other competitors, it is attractive. The potential for increased free cash flow generation as it pays down its debt and doesn't have to lay out as much in capital expenditure on 5G is attractive. It's positioned to take advantage of spectrum and potentially move into satellites. I think there are a lot of opportunities, so I'm keenly watching to see how much of a premium it ultimately closes at today. I usually don't participate in IPOs because of the premium at which they trade. But if we get back closer to the actual initial IPO valuation, I would likely be a buyer because it is exciting, and I think Jio is uniquely positioned relative to Indian markets and global telecom companies.[/ans][/faq][faq type="interview"][ques]A word on the artificial intelligence (AI) trade, which has actually roared back. It looks like there was a bit of a rout last week, and the last 10 days or so have been very painful in the US, but the market is coming right back up.[/ques][ans]Yeah, it's been painful and I've been living through that myself since, as you know, I've been an optimist on artificial intelligence, and we have a number of investments, particularly in the semiconductor space. I think this is just a signal of where the market gets disconnected from fundamentals because positioning unwinds. I continue to believe that what we have gone through with respect to the sell-off in artificial intelligence really was a painful positioning reset. What we are continuing to see throughout this earnings season is that the numbers coming in from all the semiconductor companies, whether they're graphics processing unit (GPU) makers, central processing unit (CPU) makers or memory manufacturers, are all continuing to report record numbers, beat estimates and raise their guidance going forward. And they all traded down. So, we're at the point where hopefully we'll start to see good news be met with a positive price reaction. What's going to be really important for the market is what Alphabet, Microsoft and Amazon tell us this week about their capex intentions. Are they going to be able to balance free cash flow, or are they going to put too much pressure on free cash flow as they continue to invest in this build-out, which we know they need to do? I think if they can strike that balance, that's going to be very supportive of the market continuing to push to new all-time highs. But we'll see. First, we're going to get two of the key results in the afternoon in the US.[/ans][/faq][faq type="interview"][ques]What about Reliance Industries? In the past, you've been tracking that one as well. It gets closer to a third of its value coming from Jio Platforms. What's your view? Some believe that the discount being assigned to it, the holding company discount, is a little too wide. Your view?[/ques][ans]I would agree. I think the discount is too wide, but that's never been a reason for any of these conglomerates to see their share prices catch up. So, I'm always a little sceptical. But if we can see investors finally reward Reliance for its exposure to innovation like Jio, and also see the strength of general earnings, I think potentially we could start to close that gap. But I think Jio is still the more exciting asset to own because, in the more immediate term, it has the potential to trade towards its full value, and I think it's going to drive a lot more investor interest. Again, there are plenty of other parts of this market that look incredibly attractive. I think the most exciting earnings report I've seen so far this season in India has been Eternal. Eternal's numbers were just fantastic. The ability to continue to grow quick commerce and food delivery, in spite of all the competition, and preserve margins deserves to be rewarded, as it has been. I think Eternal is another asset that investors should pick up whenever there's weakness, just because management has proven time and time again that it is able to execute.[/ans][/faq]

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