Is the Innovator Deepwater Frontier Tech ETF Ahead of the AI Curve?

AI-themed ETFs have benefitted from the hype around emerging technologies in 2023. Among them is the Innovator Deepwater Frontier Tech ETF, which has grown more than a third since the start of the year, with top holding chipmaker Marvell Technology rising more than 50%. Nevertheless, some analysts say a frothy market may be overvaluing AI stocks.

  • Innovator Deepwater Frontier Tech ETF soars 35.6% year-to-date.
  • Marvell stock jumps 51% year-to-date, despite net revenue falls slated for Q3.
  • AI market projected to reach $1.3trn by 2032, says Bloomberg Intelligence.

The Innovator Deepwater Frontier Tech ETF [LOUP] climbed 3.4% over the last week and is up 35.6% year-to-date.

A powerful performance from LOUP’s largest holding, Marvell Technology [MRVL], is a driving factor. The chipmaker’s share price gained 4% in the week and has soared 50.8% year-to-date.

LOUP’s second-biggest holding, Japan’s Nexon [3659:T], gained 2.7% across the week, and its third-biggest holding, South Korea’s SK Hynix [000660.KS], gained 1.1%. The two stocks are up 2.7% and 76.3% year-to-date, respectively.

The LOUP fund offers a broad play on the AI theme, giving investors exposure to companies involved in cutting-edge technology, including: robotics; self-driving and electric vehicles; fintech; and virtual and augmented reality. It tracks an index of 30 holdings based across the US, Asia and Europe.

The ETF is focused on information technology sector holdings (68.7%), followed by industrials (16.8%), consumer discretionary (6.1%), communication services (5.8%) and financials (2.7%).

AI and Cloud Data Solutions

Marvell Technologies is the largest holding in the LOUP fund as of 20 November, with a 5% weighting. The California-based company’s advanced chips are used in data-processing units, automobiles, ethernet adaptors, and elsewhere.

At its second quarter (Q2) earnings in August, Marvell reported a 12% year-over-year fall in net revenues to $1.3bn, while non-GAAP earnings per share of $0.33 beat analyst estimates of $0.32, according to Reuters. The company cited a weak enterprise market and economic uncertainty as reasons for the revenue decline. Marvell’s share price fell 5% in after-hours trading.

The company is set to release Q3 2024 earnings on 30 November. In August, Marvell offered revenue guidance of $1.4bn for Q3, a potential 16.7% tumble year-over-year.

Despite this somewhat gloomy outlook, Zacks Equity Research recently highlighted that Marvell beat earnings estimates in the last two quarters by an average of 5%. At a computing summit in October, the company shared its vision for AI and faster cloud-optimised data networks, which might drive future profits.

The second-largest holding in LOUP’ s portfolio is video game publisher Nexon, with a 4.9% weighting.

On 9 November, the company announced positive results for Q3 2023, with CEO Owen Mahoney saying: “Nexon is tracking to finish the year with seven consecutive quarters of double-digit revenue growth.” Group revenue climbed 23% year-over-year to ¥120.3bn.

One to Watch

A 15 November report by BlackRock identified the AI theme as a being worth targeting, with its potential “just beginning”. The report forecast enterprise AI adoption and product integration would “leap forward” in 2024.

If the sector does indeed continue to grow, this could benefit funds including the Innovator Deepwater Frontier Tech ETF.

A report by Bloomberg Intelligence in June said the AI market could be worth a mammoth $1.3trn by 2032.

However, some analysts, including Bill Blain of Shard Capital, have expressed concerns regarding the frothiness of the AI market, warning investors to exert caution.

In August, analysts at B Riley upgraded Marvell to a ‘strong buy’ from ‘hold’, based on speculation around AI growth. The analysts increased their price target to $75 from $60, suggesting upside of 34.9% from MRVL’s close of $55.58 on 17 November.

Nexon stock is rated a ‘buy’ by a consensus of 16 analysts at Market Screener.


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