/AI%20(artificial%20intelligence)/shutterstock_2242235005.jpg)
Artificial intelligence, or AI, is reaching the point of mass adoption in a diverse set of industries. Applications of AI can now be found in most of the critical items we use every day, from cars, to mobile devices, to household appliances and more. And while AI might seem like it's just about everywhere already, the market is expected to keep growing, and reach a whopping $1.9 trillion by 2030.
However, after propelling the Nasdaq Composite ($NASX) to historic first-half returns in 2023, AI stocks have pulled back considerably amid spreading macroeconomic concerns. A surprisingly resilient U.S. economy has the Fed on track to keep rates higher for longer, and the flaring geopolitical conflict in the Gaza Strip is adding to the uncertainty. Meanwhile, sector-specific trade tensions between China and the U.S. have also applied pressure.
With leading stocks in the space well off their year-to-date highs, now is a prime opportunity to scoop up some top-rated names in the sector. Here's a look at three companies with a strong track record of innovation, execution, and operational capabilities in the fast-evolving domain of AI, all of which have earned a thumbs-up from Wall Street.
Nvidia
What a run has Nvidia (NVDA) had in 2023! Up 183% on a YTD basis, the company entered the much-vaunted $1 trillion market cap club this year - and many experts believe Nvidia, the global leader in designing graphics processing units (GPU), still has plenty of upside ahead.
Founded in 1993, Nvidia's products are used in a wide range of applications, including gaming, artificial intelligence, machine learning, and data science.
In Q2, the company reported a strong set of numbers. Revenues more than doubled from the previous year to $13.51 billion, while adjusted EPS more than quadrupled over the same period to $2.70 - crushing the consensus estimate of $2.08. In fact, Nvidia's EPS has missed expectations in only one instance over the past five quarters.
Nvidia leads the AI space by designing and selling the chips critical for supporting those complex computing infrastructures, and it's looking to take the charge in the self-driving auto realm through its twin initiatives, the DRIVE Orin and DRIVE Thor Superchips. While the THOR is still under development, it is expected to deliver an impressive 2,000 teraflops of high-performance computing power which is critical for highly automated and fully self-driving vehicles. Meanwhile, the DRIVE Orin is already used by more than 25 global automobile giants.
NVDA also recently partnered with open-source unified computing framework provider Anyscale to allow developers to accelerate generative AI development by integrating Nvidia AI software with the Anyscale platform. Continuing with open-source platforms, Nvidia's newly announced open-source software, TensorRT-LLM is aimed at improving the performance of large language models significantly.
Analysts have high hopes for Nvidia's earnings growth to continue. Bottom-line growth of 785.3% is expected for the current quarter, and 289% for FY 2024 overall.
Analysts remain quite upbeat about Nvidia stock, with a consensus rating of “Strong Buy” and a mean target price of $625.53 - about 51% above current levels. Out of 35 analysts covering the stock, 31 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 1 has a “Hold” rating.
Meta
Meta Platforms' (META) cash-burning bet on the metaverse has had its fair share of backers and detractors since Mark Zuckerberg announced the Facebook parent company's pivot. However, the “year of efficiency” has yielded some returns, as the stock is up 152% on a YTD basis - driven in part by the company's new focus toward AI.
Founded in 2004, Meta is a social media and technology company which also has other popular social media apps in its portfolio, such as Whatsapp, Instagram, and the newer Threads.
Meta's latest earnings results for Q3 beat expectations, but the stock sold off after the results as investors reacted to soft Q4 guidance. Traders were also rattled by softness around advertising that Zuckerberg associated with the geopolitical unrest in the Middle East.
In fact, a key component of Meta's impressive results was the return of ad revenue growth. Advertising revenue grew by 24% from the prior year to $33.6 billion, powered by the company's AI features across its advertising formats. Notably, ad impressions grew 31% year-over-year in the third quarter, marking continued improvements from 34% in the prior quarter.
Meta also launched Llama 2, the second iteration of its next-generation open-source large language model now in general availability for free research and commercial use.
At Meta's conference last month, the company unveiled Emu, a generative AI tool that converts text to images. Another AI tool revealed at the Connect conference was the AI Studio, which aims to assist developers in building third-party apps for integration with the company's existing portfolio of messaging services through APIs.
Lastly, Meta AI was also unveiled as a direct competitor to Microsoft-backed ChatGPT. The conversational generative AI assistant will be deployed through WhatsApp, Messenger, and Instagram, as well as its Quest 3 and Ray-Ban Meta AR/VR devices in the coming months.
Analysts are predicting robust earnings growth for Meta, with forecasts calling for 58.7% improvement in the current quarter.
Analysts have a consensus “Strong Buy” rating on the stock, with a mean target price of $367.89. This denotes an upside potential of about 21% from current levels. Out of 38 analysts covering the stock, 36 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Strong Sell” rating.
Microsoft
We conclude our list with tech titan Microsoft (MSFT). The Bill Gates co-founded company, around since 1975, has revolutionized the computer software market over the past few decades - and is now heavily invested in AI as its next growth frontier, via its multi-billion dollar investment in ChatGPT parent company OpenAI.
Microsoft stock is up 41.7% on a YTD basis, with a market cap of $2.45 trillion and a dividend yield of 0.82%.
In its latest quarterly results, Microsoft reported revenues of $56.5 billion in fiscal Q1 2024, up 13% year-over-year, while EPS grew by 27.2% from the prior year to $2.99. The results topped analysts' expectations.
In recent years, Microsoft has emerged as a leader in cloud computing, which has driven its revenues higher. Recently, the company said that plans are afoot to integrate AI solutions into the entire tech stack in order to drive enterprise productivity. This could result in a further boost to Azure's adoption and aid the firm's top line and EPS growth going forward.
Notably, the integration of AI features into Bing is benefiting Microsoft, too. Bing's AI-enabled features helped the search engine gain market share for the tenth consecutive quarter.
Analysts are forecasting earnings growth of 18.1% in the current quarter and 13.3% in fiscal 2024.
Overall, analysts have a “Strong Buy" rating with a mean target price of $392.80 for the stock. This indicates an upside potential of about 16% from current levels. Out of 36 analysts covering MSFT, 30 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 3 have a “Hold” rating.
