The recent rally surrounding artificial intelligence (AI) stocks is not just a market-driven phenomenon; it is increasingly backed by solid performance forecasts from several key players in the sector. With these companies announcing positive earnings outlooks for 2024, funds heavily invested in AI stocks are finding their strategies reinforced by underlying fundamentals.

In recent weeks, many AI-focused stocks have released early performance reports for the upcoming year. Notably, Semiconductor Manufacturing International Corporation (SMIC) achieved revenues exceeding $8 billion for the first time, marking a historical high. Additionally, companies like Hangzhou Hikvision and Oatmeal Technology reported stunning growth figures, including a 33.25% increase in net profits year-on-year and a 62.36% increase in net profit excluding extraordinary items, respectively. These stocks form the backbone of various funds, alleviating concerns about tech stock valuations and fundamentals.

Several fund managers have recently indicated that the AI industry is transitioning from a narrative-based investment strategy to one driven by actual performance metrics. This shift signifies a growing divergence at the individual stock level, which necessitates a more granular approach to stock selection that prioritizes earnings support and realization of fundamentals.

Positive Earnings Expectations for AI Technology Stocks

On February 12, SMIC reported its earnings forecast for 2024, projecting an unaudited revenue of approximately 57.8 billion yuan, which translates to a 27.7% increase year-on-year. However, the net profit attributable to shareholders saw a decline of 23.3%, totaling around 3.7 billion yuan. The company attributed this setback mainly to reduced investment income.

Despite the drop in net profits, SMIC's revenue has set a new record by surpassing $8 billion. Furthermore, the company anticipates a sequential revenue growth of 6%-8% in the first quarter of 2025, with gross margins expected between 19%-21%. Provided there are no significant changes in the external environment, SMIC expects its revenue growth to outperform that of comparable industry peers, while capital expenditures are projected to remain steady relative to the previous year. Following the announcement, SMIC's stock surged 3.43% on the A-share market and 5.85% on the Hong Kong stock exchange, reflecting a year-to-date rise of 10.25% and 50.79%, respectively.

On the same day, Sensor Electronics also announced a successful earnings forecast, estimating a total revenue of 405 million yuan for 2024, up 27.76% from the previous year, and a net profit attributable to its parent company of 220 million yuan, rising by 33.25%. By the end of 2024, Sensor Electronics is expected to have total assets of 2.383 billion yuan, reflecting a 9.57% increase compared to the beginning of the period.

Sensor Electronics specializes in manufacturing MEMS (Micro-electro-mechanical systems) inertial sensors that find applications in autonomous driving, drones, humanoid robots, and other advanced technologies. The company's impressive profit margins stem from enhanced operational efficiencies and multiple projects entering trial and mass production stages, further elevating market penetration and consequently, sales.

In addition to the aforementioned companies, earlier performance forecasts included Haiguang Information, which expects a net profit ranging from 1.81 billion to 2.01 billion yuan in 2024—a surge of 43.29% to 59.12% year-on-year. Additionally, Cambrian Technology anticipates a narrowed annual net loss for 2024 to between 396 million and 484 million yuan. Another player, Songlin Technology, is predicting a net profit of 448 million yuan for the same year, reflecting a 27.13% increase.

Fundamentals are Supporting Heavily Invested Funds

Despite the upbeat performance indicators among AI stocks, concerns about high valuations and uncertain earnings persist. However, the recent disclosures from key companies have provided solid fundamental support for funds heavily reliant on these equities.

For instance, SMIC has consistently been a favored choice amongst public funds in recent years. As of the end of 2024, it was included in the portfolios of 761 different funds, managed by notable names like Zheng Weishan from Galaxy Asset Management, Hu Yibin from Hua An Fund, and Sun Quan from the Fortune Fund. In the recently concluded fourth quarter of 2024, prominent managers such as Hu Yibin and Mo Haibo increased their stakes in SMIC, reflecting their confidence in its growth trajectory.

Hu Yibin indicated in Hua An's fourth-quarter report for 2024 that he believes the upcoming economic structural transitions would become smoother. He anticipates the reshaping of market risk appetites and valuation frameworks, alleviating the constraints previously faced by innovative industries.

"As China achieves breakthroughs in core technologies across key sectors, the advantages of Chinese manufacturing are expected to shift from labor cost-driven to technology and innovation-driven. Thus, many companies are poised to become market leaders as they achieve advancements in cutting-edge technologies," Hu Yibin noted, projecting strong growth in revenue, market share, and return on equity (ROE) for these firms in the long term.

Notably, Cambrian Technology, Haiguang Information, and Sensor Electronics also received increased attention from multiple renowned fund managers in the last quarter of the year. For example, Gao Bing's Huashang Intelligent Life raised Cambrian and Sensor Electronics to its first and third-largest positions, subsequently increasing Haiguang Information to its third-largest position. Similarly, Liu Gesong's Guangfa Innovation Upgrade raised Cambrian to its top position.

Fund Managers Prioritize Realized Fundamentals

The improving performance forecasts from numerous AI technology firms indicates that the growth of the AI industry is transitioning from speculative investing to a phase where fundamental realizations are essential. Recently, several fund managers have expressed their intent to concentrate on individual stock performance metrics to seek investment opportunities driven by solid earnings and fundamental growth.

Jia Peng, manager of the Yinghua Multidimensional Fund, emphasized the significance of established fundamentals following several months of policy expectations. He anticipates ongoing tensions between strong expectations and weak realities until a turning point emerges in the fundamentals.

"From an industry cycle perspective, the 2023-2024 period marks a transformative phase driven by innovation, systematically evolving from upstream production metrics down to downstream dynamics. Although it remains unclear which scenarios will see early breakthroughs, the certainty of an upward trend in fundamentals is unmistakable," Jia Peng asserted. "Looking toward 2025 and beyond, the AI industry is entering a visible trend investment phase. Moreover, China's push for technological self-sufficiency is progressing steadily, which may lead related companies toward a period of rapid fundamental realization. In the short term, the upcoming quarter is crucial for performance validation, with upstream foundational infrastructure in the AI sector presenting a high margin of safety, especially for large-cap blue-chip companies."

Zhong Qi, chief economist and fund manager at Huabao Fund, regards growth assets represented by emerging productivity as central to generating 'alpha.' In 2025, he plans to primarily target growth industries with performance surprises. "I favor companies showing strong growth trajectories such as '50% this year, 60% next year, and 70% the year after,'" Zhong stated, emphasizing his strategic interest in investment opportunities within AI applications and robotics sectors.

Fund manager Pu Shilin of Fortune China's Long-term Growth Mixed Fund noted that the technology sector is expected to perform well in 2024, with stock prices already reflecting certain expectations. He believes that this year will move into a verification phase, necessitating a sharper focus on confirming fundamentals as the market and stock performances begin to diverge.