Nasdaq Market location in New York's Times Square neighborhood on Tuesday, May 31, 2022.
Michael Nagel | Bloomberg | Getty Images
The Nasdaq is now just 6.5% below the record high it reached in November 2021.
Across the industry, the big story this year has been a return to risk, driven by the Federal Reserve's pause on interest rate hikes and a more stable outlook for inflation. Companies also benefited from cost-cutting measures they took starting late last year to focus on efficiency and boost profit margins.
“Once you have the Fed stepping back, no more, in terms of raising interest rates, you can get back to the business of pricing companies right — how much money are you making, what kind of multiples are you putting on them,” said Kevin Simpson, founder of Capital Wealth Planning. , he told CNBC's “Halftime Report” on Tuesday. “It could last until 2024.”
While the technology industry got a big boost from the macro environment and the prospect of lower borrowing costs, the emergence of generative AI has generated excitement in the sector and prompted companies to invest in what is seen as the next big thing.
Nvidia has been the big winner in the AI rush. The chipmaker's stock price rose 239% in 2023, as major cloud vendors and heavily funded startups snapped up the company's graphics processing units (GPUs), which are essential for training and running advanced AI models. In the first three quarters of 2023, Nvidia generated net income of $17.5 billion, up more than six-fold from the previous year. Revenues tripled last quarter.
Nvidia CEO Jensen Huang said in March that AI's “iPhone moment” had begun.
“Startups are racing to build disruptive products and business models, while established companies are looking to respond,” Huang said at the Nvidia Developer Conference. “Generative AI has sparked a sense of urgency in organizations around the world to advance AI strategies.”
Consumers were introduced to generative AI thanks to OpenAI's ChatGPT, which the Microsoft-backed company launched in late 2022. The chatbot allowed users to type a few words of text and start a conversation that could produce complex responses in an instant.
Developers are starting to use AI to create tools for booking travel, creating marketing materials, enhancing customer service, and even coding software. Microsoft, Google, Meta, and Amazon touted their heavy investments in generative AI as they integrated the technology across product families.
Generative AI will likely generate tens of billions of dollars in revenue for Amazon Web Services in the next few years, Amazon CEO Andy Jassy said at his company's earnings conference call in October, adding that Amazon uses models to forecast inventory and create transportation routes for drivers. And help third-party sellers create product pages and help advertisers create images.
“We have been surprised by the pace of growth in generative AI,” Jassy said. “Our generative AI business is growing very, very quickly. It's already a very important business for us by any standard. However, I would also say that the companies are still in the relatively early stages.”
Amazon shares rose 81% in 2023, its best year since 2015.
Microsoft investors have enjoyed a rise this year unlike anything they've seen since 2009, as shares of the software company rose 58%.
In addition to its investment in OpenAI, Microsoft has integrated the technology into products like Bing, Office, and Windows. Copilot has become the brand for large-scale AI services, which CEO Satya Nadella described Microsoft last month as “Copilot Company.”
“Microsoft’s partnership with OpenAI and subsequent product innovation through 2023 has driven a dynamic shift in the market,” Michael Turin, a Wells Fargo analyst who recommends buying the stock, wrote in a Dec. 20 note to clients. “MSFT is now viewed by many as the clear leader in the early AI wars (even ahead of market share leader AWS).”
Meanwhile, Microsoft was generating profits at a historic rate. In its latest earnings report, Microsoft said that gross profit margin exceeded 71% for the first time since 2013, when Steve Ballmer was running the company. Microsoft has found ways to run its data centers more efficiently and reduced reliance on hardware, which has increased profit margins for the segment that contains Windows, Xbox, and search.
Microsoft CEO Satya Nadella (right) speaks as OpenAI CEO Sam Altman (left) looks on during the OpenAI DevDay event on November 06, 2023 in San Francisco, California. Altman delivered the keynote at the first-ever Open AI DevDay conference.
Justin Sullivan | Getty Images
After Nvidia, the biggest stock rally among the tech giants was Meta shares, which jumped nearly 200%. Nvidia and Meta were among the best-performing companies in the S&P 500.
Meta's rise began in February, when CEO Mark Zuckerberg, who founded the company in 2004, said 2023 would be an “efficiency year” for the company after the stock fell 64% in 2022 due largely to three straight quarters of declines. Revenues.
The company cut more than 20,000 jobs, proving to Wall Street that it was serious about rationalizing its expenses. Growth then returned as Facebook gained market share in digital advertising. For the third quarter, Meta posted a 23% expansion, its largest increase in two years.
Like Meta, Uber wasn't around during the dot-com crash. The ride-hailing company was founded in 2009, at the height of the financial crisis, and became a technology darling in the following years, when investors favored innovation and growth over profit.
Uber went public in 2019, but it long fought the idea that it could never be profitable because so much of its revenue went to paid drivers. But the economic model finally started working late last year, both for ride-sharing and food delivery companies.
All of that allowed Uber to score a big milestone for investors earlier this month, when the stock was added to the S&P 500. Index members must have positive earnings in the most recent quarter and over the previous four quarters in total, according to S&P rules. Uber reported net income of $221 million on revenue of $9.29 billion in the third quarter, and in the past four quarters altogether, it has generated more than $1 billion in profits.
Uber shares rose to a record high this week and have jumped 149% for the year. The stock, listed on the New York Stock Exchange, ended the year as the sixth-biggest gainer in the S&P 500.
Despite the technology rally in 2023, there was a dearth of new opportunities for general investors during the year. After a dismal 2022 for tech IPOs, very few names hit the market in 2023. The three most high-profile IPOs — Instacart, Arm, and Klaviyo — all took place during a one-week stretch in September.
For most companies that are late in the IPO process, there is more work to be done. The general market remains unwelcoming to cash-burning companies that have yet to prove they can achieve sustainable profitability, a problem for many startups that amassed mountains of cash during the zero-interest days of 2020 and 2021.
Even for profitable software and Internet companies, multinationals have contracted, meaning that valuing startups that materialize in the private market will require many of them to take cuts when they go public.
Byron LichtensteinThe managing director at investment firm Insight Partners described 2023 as a “great reset.” Companies best positioned for IPOs are unlikely to debut until the back half of 2024 at the earliest, he said. In the meantime, they will make the necessary preparations, such as appointing independent board members and spending on IT and accounting, to ensure they are prepared.
“You have this dynamic of where expectations were in '21 and the prices that were being paid at that time,” Lichtenstein said in an interview. “We're still dealing with a little bit of that leftover.”
— CNBC's Jonathan Vanian contributed to this report
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