Amid the uncertainty around the upcoming election and the mixed earnings reports from major technology companies, I’m considering locking in some profits from my 2024 investments in semiconductor stocks. To protect my exposure, I plan to purchase put options on the VanEck Semiconductor ETF (SMH), which has seen significant growth.
Market risks can unfold quickly, and Thursday provided a stark reminder of this when the S&P 500 and the Nasdaq 100 experienced their worst single-day drops since early September, with both indexes trading on high volume. Alongside this, the Cboe Volatility Index (VIX), an indicator of market anxiety, surged above 23, suggesting investors are becoming increasingly wary of potential downturns.
Adding to the complexity, recent labor market data showed that only 12,000 jobs were created in October, marking a noticeable slowdown in hiring. The data may be somewhat skewed by external factors, including two recent hurri
This week’s earnings reports from megacap technology companies signaled that their substantial investments in networks and infrastructure to fuel the AI boom are beginning to translate into profits. Earlier in the year, concerns grew among investors that the payoff from the massive spending on AI would be delayed, which led to sell-offs in several major AI-focused stocks. However, this week, some of the largest tech companies offered encouraging signs that their increased spending may indeed yield returns, justifying the patience shareholders have shown.
“The AI theme is intact if you’re the mega caps,” said Gene Munster of Deepwater Asset Management, noting that these companies have demonstrated their ability to monetize their AI investments while maintaining solid profitability. Munster emphasized that as long as they continue building infrastructure, the broader AI trade looks promising.
Among the megacap stocks, Alphabet, Amazon, and Microsoft reported impressive year-over-year cloud revenue growth of 35%, 19%, and 20%, respectively. However, out of the five biggest companies that have reported results so far—Meta Platforms, Alphabet, Amazon, Apple, and Microsoft—only two managed to end the week with gains.
Several companies also provided insights that indicate a robust and sustained demand for AI. Microsoft’s Chief Financial Officer stated that demand for AI services is currently exceeding their capacity and projected Azure’s cloud platform could grow by as much as 32% on a constant currency basis in the upcoming quarter. Alphabet’s CEO, Sundar Pichai, highlighted that the company’s “full stack” of AI tools is already operating at scale. Meanwhile, Amazon’s CEO, Andy Jassy, justified the company’s increased AI spending, assuring investors of its long-term rewards.
“People were betting against big tech making their numbers,” commented Ray Wang, principal analyst at Constellation Research. “What they showed was that they still have the size and scale to crank out earnings because their cost of sales is much lower and size and scale matter.” Wang believes that, in the long run, only a select few tech companies will succeed in the high-cost AI landscape, contrasting it with the more open and decentralized internet boom of the 1990s and 2000s. Deep financial resources will be a decisive advantage, allowing today’s tech giants to continue dominating in the AI space.
Mark Malek, chief investment officer at SiebertNXT, added that the heavy spending we see now is essential for these companies to retain their market leadership. He noted that many investors underestimate the time and resources required to achieve the scale necessary for AI.
Within the realm of megacap companies, Wang pointed out that Microsoft faces growing pressure to ensure it’s investing enough in refreshing its infrastructure. Satya Nadella’s company, known for Windows and Xbox, reportedly still relies on some of the oldest data centers among its peers.
In the nearer term, Wang noted that Meta Platforms and Amazon are nearing the end of their heightened spending cycles, suggesting they might see payoffs sooner. Eric Clark, portfolio manager at the Rational Dynamic Brands Fund, commented that Amazon’s strong performance and positive outlook should reassure those skeptical of the company’s rapid spending and concerns over its retail business. Clark believes these results should “push the naysayers out the door.”
Meanwhile, the continued heavy spending by megacap technology companies suggests that there’s still room for Nvidia, the de facto AI leader, to grow. Since the release of ChatGPT in late 2022, Nvidia’s stock has skyrocketed, gaining more than seven-fold and boosting both the broader market and the technology sector.
However, there may be an eventual slowdown in this growth. As the initial wave of AI infrastructure building tapers off, Nvidia’s high growth rate could moderate. This transition would likely pave the way for other companies, such as Oracle and Salesforce, which may soon be positioned to leverage AI more fully within their operations. “There’s a good runway of growth for the next two or three quarters in Nvidia,” said Clark. “But when the rate of change is slowing, Nvidia’s stock is not going to do very well. You’re going to see the most crowded trade unwind—and usually, it tends to be violent.”
In summary, the recent earnings reports suggest that tech giants are making headway in their AI investments, and for many, the payoff may already be materializing. Companies like Microsoft and Alphabet are showing that demand for AI remains strong and may continue to drive growth in their cloud businesses. At the same time, the considerable capital needed to compete in AI puts smaller players at a disadvantage, leaving the megacaps better positioned to dominate this transformative trend.
This period of rapid AI expansion is sustaining Nvidia’s growth as it supplies the hardware behind much of the AI build-out. But as the initial wave of AI-driven infrastructure investment eventually decelerates, a shift toward practical applications and adoption among second-tier players may take hold. For now, the market’s embrace of AI remains robust, and the tech giants are betting that their aggressive investments will pay off over the long haul. However, investors should be cautious, as the landscape may shift, and the high-flying nature of AI trades could bring volatility along with opportunity.
canes and a Boeing workers’ strike, but it still points to a weaker hiring trend than anticipated. Given this context, I’m inclined to hedge my exposure, particularly as the market and tech stocks have experienced substantial gains this year.
Generally, I prefer to structure my options trades by creating spreads, allowing me to collect a premium on one leg of the trade to offset the cost of the other. This time, however, I want to limit my investment to a specific amount I’m willing to spend for short-term downside protection. My strategy involves purchasing a simple put option with a brief duration, lasting just beyond the election, to safeguard against potential declines. If the market remains stable, my tech-heavy portfolio should continue to generate gains in 2024.
For this trade, I purchased a put option on SMH with a $240 strike price, expiring on November 15, 2024. This option cost me $5.25 per contract, which amounts to $525 per put option. When I made this purchase, SMH was trading at around $245.50, so these options will only start to deliver returns if SMH falls roughly 4% from its current level. If SMH drops below $234.75, I would capture any further downward movement in its price.
This approach enables me to mitigate downside risks over the near term while maintaining my exposure to tech stocks for potential gains in the long run.
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