Internet infrastructure stocks have been performing well this year, with a 31% increase year-to-date, surpassing the Nasdaq 100’s 20% rise. This growth is attributed to the excitement surrounding generative artificial intelligence technologies. AI workloads are fueling demand for accelerated computing chips and GPUs, benefiting companies like Nvidia and AMD. Nvidia’s sales tripled in Q1 FY’25, reaching $26 billion, while net profits increased over 7x to $14.9 billion. This trend is expected to benefit other players in the computing ecosystem, including memory manufacturers like Micron.
The shift towards AI models that work with speech, images, video, and 3D is driving the need for higher computing power, leading companies to shift towards accelerated computing using GPUs. However, networking players within the theme, such as Cisco, have seen lower demand from cloud service providers and telecommunication players due to economic uncertainty. Despite performing well over a longer period, the Internet Infrastructure theme experienced a decline of close to 40% in 2022, underperforming the S&P 500.
The Trefis High Quality Portfolio has outperformed the S&P 500 each year over the same period, as HQ Portfolio stocks provided better returns with less risk. The current uncertain macroeconomic environment, with high oil prices and elevated interest rates, raises questions about whether the theme will face a situation similar to 2022 or see a strong jump. While the structural shift toward greater digitization will drive the theme in the long run, high valuations make the risk-to-reward tradeoff less attractive for the near term.
Nvidia stock has been the strongest performer in the theme, rising almost three times over the past 12 months due to increased demand for graphics processing units from the AI space. On the other hand, Cisco stock has fared worse than other stocks in the theme, declining by about 7% over the last 12 months. Overall, the Internet Infrastructure theme remains strong, driven by the demand for AI technologies and the shift towards greater digitization, despite facing challenges in networking equipment demand and concerns about high valuations. Investors are advised to carefully consider the risks and rewards of investing in this sector.
