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Artificial intelligence (AI) is revolutionizing various sectors, propelling the stock market to unprecedented heights. With the global AI market poised to exceed $1 trillion by 2030, the frenzy surrounding AI is justified.
The poster child for the AI investment boom has been Nvidia (NVDA), renowned for its chips crucial for AI model training and execution. But while NVDA might be spearheading Phase 1 of the AI trade, analysts at Goldman Sachs (GS) say there are three additional phases of the AI boom on the horizon, with each wave offering its own unique investment opportunities.
Phase 2 “includes semiconductor firms, cloud providers, data center REITs, hardware and equipment companies, security software stocks, and utilities companies,” according to Goldman - and many of these names still have room for significant multiple expansion.
Three names that Goldman Sachs analysts think are set to benefit from the “Phase 2” stage of AI adoption are semiconductor firm Monolithic Power (MPWR), software company Synopsys (SNPS), and data center REIT American Tower (AMT), which have all earned consensus “Strong Buy” ratings on Wall Street.
Stock #1: Monolithic Power Systems (MPWR)
Headquartered in Kirkland, Washington, Monolithic Power Systems, Inc. (MPWR) designs and manufactures integrated power semiconductor solutions and power delivery architectures for computing and storage, automotive, industrial, communications, and consumer applications markets. Its market cap currently stands at $32.9 billion.
Monolithic Power stock is up 38.3% over the past 52 weeks, outperforming the S&P 500 Index’s ($SPX) 33.2% gains over this time frame. The stock offers an annualized dividend of $4.00 per share, which translates to a dividend yield of 0.59%.
Monolithic Power addresses power design challenges in AI systems, contributing to AI infrastructure. Their efforts in AI hardware power are part of a broader initiative to define the AI power ecosystem and support AI market growth.
Monolithic Power’s price surge last month was driven by stronger-than-expected fiscal 2023 Q4 revenue of $454 million and adjusted net income of $140.8 million, or $2.88 per share. Management boosted total assets by 18.2% year over year to $2.43 billion, while trimming total liabilities by 1.5% annually to $384.4 million as of Dec. 31, 2023.
Moreover, the company projects sales for the current quarter to range between $437 million and $457 million. Gross margin is stabilizing as revenue improves, and Monolithic Power anticipates the current quarter's gross margin to range between 55.1% and 55.7%.
Monolithic Power stock has a consensus “Strong Buy” rating. Out of the 12 analysts offering recommendations for the stock, nine rate it a “Strong Buy,” two have a “Moderate Buy," and one advises a “Hold.”
The average analyst price target for MPWR is $739.40, indicating a potential upside of 9.9% from current levels. However, KeyBanc's high price target of $830, assigned in February, suggests that the stock could rally as much as 23.3% from current levels.
Stock #2: Synopsys (SNPS)
Valued at $91.8 billion by market cap, Sunnyvale, California-based Synopsys, Inc. (SNPS) is a software development company that provides tools and services for designing and verifying electronic systems. The company invested significantly in AI and machine learning (ML) to develop new tools to help designers automate more of the design process.
Synopsys stock gained 60.6% over the past 52 weeks, surpassing the SPX’s gain over this time frame.
In late February, Synopsys reported fiscal 2024 Q1 revenue of $1.65 billion, up 21% year over year, surpassing Wall Street estimates of $1.64 billion. Similarly, Q1 non-GAAP EPS of $3.56 surpassed projections due to robust demand for semiconductor R&D, despite macro uncertainties.
During the quarter, Synopsys reported positive feedback from pilot participants in its Synopsys.ai Copilot, which integrates Microsoft (MSFT) Azure OpenAI to accelerate chip design. Along with its better-than-expected Q1 results, shares surged on the company’s strong guidance, led by AI product demand. CEO Sassine Ghazi sees AI driving customer investments in silicon and systems, positioning the company for future growth. The company projects adjusted EPS for the current quarter between $3.09 and $3.14.
Synopsys stock has a consensus “Strong Buy” rating. Of the 14 analysts offering recommendations for the stock, 12 recommend it as a “Strong Buy,” one suggests a “Moderate Buy,” and one gives a “Hold” rating.
The average analyst price target for SNPS is $609, indicating a potential upside of 2.1%. However, the high price target of $675 suggests the stock could rally as much as 13.2% from current levels.
Stock #3: American Tower (AMT)
Boston-based American Tower Corporation (AMT), one of the largest global REITs, is a key player in multitenant communications real estate, offering tower space leasing along with customized collocation solutions, including in-building systems, distributed antenna systems, and managed rooftops, expediting network deployment. Its market cap currently stands at $90.4 billion.
American Tower stock is nearly unchanged over the past 52 weeks. The stock offers an annualized dividend of $6.45 per share, which translates to a dividend yield of 3.33%.
The wireless communications infrastructure company delivered robust growth and profitability in Q4, with revenue reaching $2.79 billion and an adjusted EBITDA margin of 63.2%. Property revenue surged to $2.76 billion, while free cash flow jumped 17.7% year over year to $611 million. Funds from operations of $2.29 per share easily topped consensus estimates.
Advancements in AI are expected to drive substantial demand for American Tower's assets. For 2024, data center revenue is projected to range between $900 million and $920 million, up about 10% year-over-year. “AI is reducing overall capacity in the market or overall supply of the markets, which is leading to some favorable pricing trends for us,” said CEO Steve Vondran.
American Tower stock has a consensus “Strong Buy” rating. Out of the 17 analysts offering recommendations for the stock, 13 rate it “Strong Buy,” two have a “Moderate Buy," and two advise a “Hold.”
The average analyst price target for AMT is $228.69, indicating a potential upside of 17.9%. However, the high price target of $245 suggests that the stock could rally as much as 26.3% from current levels.
