Worried about Nvidia? This stock offers clues about when AI will go mainstream, Scotiabank says

Nvidia’s stock price has experienced volatility recently due to concerns about future demand for AI chips and the pace of AI adoption. Despite a strong performance earlier this year, the stock dropped by 13% over three trading days before recovering. The demand for AI chips from large cloud computing companies such as Microsoft, Amazon, and Google has been significant, with these firms spending billions on Nvidia chips over the past two years. However, investors are questioning whether these tech giants will see a return on their investment and if they will continue to invest in AI chips.

Raj Shant, managing director at Jennison Associates, one of Nvidia’s top 10 shareholders, has expressed concerns about the demand for AI chips and the profitability of companies investing in them. Capital Economics, an economic research and consultancy firm, has suggested that the benefits of new technologies, including AI, often take longer to materialize in the real economy than expected. However, they have noted tentative signs that spending on AI chips may be spurring investment in the broader economy.

Capital Economics believes that productivity improvements seen over the past two quarters in the U.S. economy can be partly attributed to investment in software rather than hardware. They predict that the boost to productivity from AI will be substantial but won’t be felt until the second half of this decade.

For insights into the adoption of AI technologies, Scotiabank has looked at CGI Inc, a Canadian multinational IT firm that helps companies introduce AI into their business models and operations. CGI has announced plans to invest $1 billion over three years to expand its AI capabilities. However, Scotiabank analyst Divya Goyal has pointed out a slower than anticipated adoption of the technology among CGI’s customers. Many businesses are still in the discovery phase of the AI trend, producing proof-of-concept applications, while others are waiting for AI software to mature before implementing it.

Scotiabank expects CGI to benefit and capture any future growth as large companies prepare to start AI spending. They predict that CGI shares will rise 17% from their current price.

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