Tech ETFs Ride ChatGPT Wave Post Mixed Quarterly Performance

Top Technology Equities ETFs SPDR Select Sector Fund - Technology XLK, Vanguard Information Tech ETF VGT, and iShares U.S. Technology ETF IYW gained 4.11% - 4.80% last week.

The ETFs have the highest exposure to Apple Inc AAPL and Microsoft Corp MSFT at 15%-22%. Nvidia Corp NVDA is the next significant stock constituent.

The tech stocks posted a mixed quarterly earnings performance due to economic uncertainties and macro headwinds.

In January, Microsoft reported second-quarter revenue of $52.7 billion, missing a Street estimate of $52.97 billion. EPS was $2.32 in the second quarter, beating a Street estimate of $2.30.

In February, Apple reported Q1 EPS of $1.88, missing the consensus estimate of $1.94 per share. Apple's top line fell 5% year-over-year to $117.2 billion, missing the consensus estimate of $121.1 billion.

However, OpenAI has been the hottest topic in the sector in 2023. It grabbed the investor's attention in January courtesy of its chatbot ChatGPT, adept at answering questions and writing essays and poems, and image generator Dall-E 2, which turns language prompts into novel images.

In January, Microsoft inked a new multiyear, $10 billion investment with ChatGPT-maker OpenAI. The deal followed its previous investments in 2019 and 2021. Microsoft saw a healthy engagement on the chat feature.

Apple has reportedly given its nod for an AI chatbot-driven email app called BlueMail following assurances from its developer that it has content moderation tools.

Alphabet Inc GOOG GOOGL Google invested nearly $400 million in artificial intelligence startup Anthropic AI, which trialed a rival to ChatGPT. Google trialed new AI-powered chat products to integrate them into a search engine. 

Google also tested a chatbot called "Apprentice Bard," where employees can ask questions and receive detailed answers similar to ChatGPT. 

Last week, Needham found that MSFT has a path to generating ~$40 billion of revenue uplift for MSFT and over $2 of EPS potential, likely over 5+ years, from monetizing OpenAI's technology in MSFT's productivity suite and premium GPT-integrated offerings. Needham anticipates additional upside from Bing AI and other potential revenue streams not included in the $2+ EPS figure.

Needham thinks NVDA's considerable investment in software represents the competitive moat that continues their lead, and the monetization of that software which has only just begun represents yet another catalyst.