The Nasdaq MarketSite in New York's Times Square neighborhood on Tuesday, May 31, 2022.
Michael Nagle | Bloomberg | Getty Images
The Nasdaq is just 6.5% below its November 2021 record high.
Across the industry, the big theme this year has been a return to risk, driven by the Federal Reserve's halt to rate hikes and a more stable inflation outlook. Companies also benefited from cost-cutting measures they had taken since late last year to focus on efficiency and increasing profit margins.
“Once you have a Fed that's holding back on raising rates, you can get back to the business of pricing companies right – how much money are they making, what multiplier are you putting on it,” Kevin Simpson, founder of Capital Wealth Planning said on CNBC's “Halftime Report” on Tuesday. “It can continue until 2024.”
While the tech industry received a major boost from the macroeconomic environment and the prospect of lower borrowing costs, the emergence of generative artificial intelligence created excitement in the industry and pushed companies to invest in what is seen as the next big thing.
Nvidia was the big winner of the AI rush. The chipmaker's stock price rose 239% in 2023 as major cloud providers and heavily funded startups snapped up the company's graphics processing units (GPUs), which are needed to train and run advanced AI models. In the first three quarters of 2023, Nvidia generated net profit of $17.5 billion, more than six times year-on-year. Sales tripled in the last quarter.
Nvidia CEO Jensen Huang said in March that AI's “iPhone moment” had begun.
“Startups are racing to develop breakthrough products and business models, while incumbents are racing to respond,” Huang said at Nvidia’s developer conference. “Generative AI has created a sense of urgency in companies worldwide to develop AI strategies.”
Consumers learned about generative AI thanks to OpenAI's ChatGPT, which the Microsoft-backed company released in late 2022. The chatbot allowed users to enter a few words of text and start a conversation that could lead to sophisticated answers in no time.
Developers began using generative AI to create tools for booking travel, creating marketing materials, improving customer service, and even programming software. Microsoft, Google, Meta and Amazon have touted their heavy investments in generative AI as they embedded the technology across their product suites.
Amazon CEO Andy Jassy said at his company's earnings call in October that generative AI is likely to generate tens of billions of dollars in revenue for Amazon Web Services over the next few years, adding that Amazon uses the models to forecast inventory and Drivers used to determine transportation routes, help third parties create product pages, and help advertisers generate images.
“We were surprised by the pace of growth in generative AI,” Jassy said. “Our generative AI business is growing very, very quickly. In almost every way, it's already a pretty significant business for us. And yet I would also say that the companies are still at a relatively early stage.”
Amazon shares rose 81% in 2023, their best year since 2015.
Microsoft investors experienced a rally this year unlike any seen since 2009, with shares of the software company rising 58%.
In addition to its investment in OpenAI, Microsoft has integrated the technology into products such as Bing, Office and Windows. Copilot became the brand for its comprehensive generative AI service, and CEO Satya Nadella last month described Microsoft as “the Copilot company.”
“Microsoft's partnership with OpenAI and subsequent product innovation through 2023 has resulted in a shift in market dynamics,” wrote Michael Turrin, a Wells Fargo analyst who recommends buying the stock, in a Dec. 20 note to clients. “Many now consider MSFT to be the absolute leader in the early AI wars (even ahead of market leader AWS).”
Meanwhile, Microsoft has been generating profits at a historic pace. In its most recent earnings report, Microsoft said its gross margin exceeded 71% for the first time since 2013, when Steve Ballmer led the company. Microsoft has found ways to run its data centers more efficiently and reduced its reliance on hardware, leading to higher margins for its Windows, Xbox and search segment.
Microsoft CEO Satya Nadella (R) speaks as OpenAI CEO Sam Altman (L) looks on during the OpenAI DevDay event on November 6, 2023 in San Francisco, California. Altman gave the keynote address at the first-ever Open AI DevDay conference.
Justin Sullivan | Getty Images
After Nvidia, the biggest stock gain among mega-cap tech companies was Meta's shares, which rose nearly 200%. Nvidia and Meta were by far the two top performers in the S&P 500.
Meta's rally was sparked in February when CEO Mark Zuckerberg, who founded the company in 2004, said 2023 would be the company's “year of efficiency” after the stock plunged 64% in 2022, largely in three quarters with declining sales as a result.
The company cut more than 20,000 jobs, proving to Wall Street that it was serious about streamlining its spending. Then growth returned as Facebook gained market share in digital advertising. In the third quarter, Meta posted growth of 23%, its strongest increase in two years.
Like Meta, Uber wasn't around during the dot-com crash. The ride-hailing company was founded in 2009 in the midst of the financial crisis and became a tech darling in the years that followed as investors prioritized innovation and growth over profits.
Uber went public in 2019 but has long struggled with the idea that it could never be profitable because much of its revenue went to paying drivers. But late last year, the economic model finally started to work, for both the ride-hailing and food delivery businesses.
All of this allowed Uber to reach a major milestone for investors earlier this month when the stock was added to the S&P 500. Members of the index must, under S&P's rules, have positive earnings overall in the most recent quarter and the previous four quarters. Uber reported third-quarter net income of $221 million on revenue of $9.29 billion, earning a total profit of more than $1 billion over the past four quarters.
Uber shares hit a record high this week, rising 149% for the year. The New York Stock Exchange-listed stock ended the year as the sixth-biggest gainer in the S&P 500.
Despite the tech rally in 2023, there was a lack of new opportunities for public investors during the year. After a dismal 2022 for technology IPOs, very few names came to market in 2023. The three most notable IPOs – Instacart, Arm and Klaviyo – all took place within a week-long period in September.
For most companies late in the IPO pipeline, more work still needs to be done. The public market remains unwelcome to cash-burning companies that haven't yet proven they can be sustainably profitable, which is a problem for the many startups that amassed mountains of cash in the zero-interest-rate days of 2020 and 2021.
Even profitable software and internet companies have seen their metrics fall, meaning the valuation that start-ups fetch in the private market will require many of them to take a discount when they go public.
Byron Lichtenstein, managing director of venture capital firm Insight Partners, called 2023 “the great reset.” He said the companies best positioned for initial public offerings are unlikely to debut until the second half of 2024 at the earliest. In the meantime, they will make necessary preparations, such as hiring independent board members and spending on IT and accounting, to ensure they are ready.
“There is this dynamic of expectations in '21 and the prices that were paid then,” Lichtenstein said in an interview. “We’re still struggling a bit with this hangover.”
—CNBC's Jonathan Vanian contributed to this report
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