Is the artificial intelligence stock market boom still wired or tired? Top AI stocks such as Microsoft (MSFT) and Nvidia (NVDA) face high expectations. For many companies — such as Google parent Alphabet (GOOGL), Amazon.com (AMZN) and Facebook parent Meta Platforms (META) — the rise of generative AI poses both risk and opportunity.
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Amid the emergence of generative AI — which can generate text, images, and video — it’s a good time to be cautious amid the hype. Many companies suddenly tout AI product roadmaps. In general, look for AI stocks that use artificial intelligence to improve products or gain a strategic edge.
The best AI stocks to buy span chipmakers, software companies, cloud computing service providers and technology giants. Amid increased capital spending by cloud computing giants, the big question is how much incremental AI-related revenue they’re getting.
What’s clear is that AI stocks are under more scrutiny.
“We expect AI to transition from a ‘tell me’ to a ‘show me’ story, with any disconnect between investments and revenue generation to come under increased scrutiny,” said a Bank of America report. “Overweight capex growers that fail to monetize quickly enough could be vulnerable to de-risking.”
Nvidia Stock: Guidance Underwhelms
A bellwether for AI stocks, chipmaker Nvidia reported Q2 earnings on Aug. 28. October quarter guidance underwhelmed some investors amid margin pressure.
“Q3 revenue guidance of $32.5 billion was maybe a touch below investor expectations and the implied Q4 gross margin is down a few 100 basis points quarter-over-quarter as (new AI chip) Blackwell will have lower margins out of the gate given its complexity,” said UBS analyst Timothy Arcuri in a report.
Nvidia stock has jumped 137% in 2024 after surging 239% last year. Further, Nvidia stock remains on the IBD Leaderboard.
Shares in Marvell Technologies (MRVL) popped on its Q2 results and outlook. Marvell is ramping up production of custom AI chips for Amazon and Google.
Meanwhile, Nvidia and Arista Networks (ANET) are squaring off in the AI Ethernet networking market. Data center gear maker Arista turned in strong Q2 results. Also, Arista stock has gained 47% in 2024.
Tech giants are spending heavily on data center infrastructure, such as AI chips and servers, as well as research and development. Capital spending boomed in the June quarter at Google, Microsoft, Meta Platforms and Amazon.
In general, semiconductor plays have out-performed software companies as the best AI stocks. But data analytics software maker Palantir (PLTR) has bucked that trend. PLTR stock has gained 80% this year.
Arista stock has dropped out of the IBD 50 roster of growth stocks while Palantir stock ranks No. 18.
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Further, Microsoft is the biggest investor in startup OpenAI, the leader in generative AI. Microsoft’s fiscal Q4 Azure cloud-computing growth missed Wall Street targets. Also, generative AI “Co-Pilots” have not yet boosted Microsoft’s Office 365 business, analysts say.
Meanwhile, Apple is in talks to invest in OpenAI as part of a new funding round that would value the startup at over $100 billion.
At its Worldwide Developers Conference, or WWDC, Apple said it will integrate OpenAI’s ChatGPT into the Siri voice assistant and iOS 18. The big question is whether Apple “Intelligence” features will spur a major iPhone 16 upgrade cycle in late 2024 and 2025.
New AI features will only be available on the iPhone 15 Pro/Pro Max and upcoming iPhone 16 models. But Apple will add AI features gradually into 2025, which could impact demand for iPhone 16 models.
So far, the biggest demand for AI chips has come from cloud computing giants and internet companies. Meanwhile, chip maker Advanced Micro Devices (AMD) beat Q2 consensus estimates.
Broadcom (AVGO), Qualcomm (QCOM), ARM Holdings (ARM), and Marvell Technologies are other AI chipmakers to watch.
One big issue for AI stocks is how fast companies ramp up pilot programs to commercial deployment.
AI Stocks: Software Monetization An Issue
However, ServiceNow (NOW) gained on its Q2 earnings and outlook.
Also, for most big application software companies, how to charge for AI-related products has been an issue.
Further, most enterprise software makers will not monetize generative AI, or “conversational AI,” in a material way until late 2025, some analysts say. Many U.S. companies are pursuing custom AI software development projects, which will take longer to ramp up commercially.
Meanwhile, here’s a look at the enterprise AI market.
Also, AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions.
Until recently, machine learning was largely limited to models that processed data to make predictions. The AI models focused on pattern recognition from existing data. Corporate spending on AI projects was modest as companies mulled return on investment.
AI Stocks To Watch By Industry Group
| Company | Symbol | Comp Rating | Industry name | AI angle |
|---|---|---|---|---|
| Nvidia | (NVDA) | 97 | Elec-Semiconductor Fabless | Cloud computing giants buying more chips to train AI models or run AI workloads. Big lead over rival Advanced Micro Devices (AMD). |
| CrowdStrike | (CRWD) | 69 | Computer Software-Security | AI chatbots expected to automate more functions in security-operations centers and reduce the time to detect computer hacking. |
| Arista Networks | (ANET) | 95 | Computer-Networking | Sells computer network switches that speed up communications among racks of computer servers packed into “hyperscale” data centers. With AI growth, internet data centers will need more network bandwidth. |
| Microsoft | (MSFT) | 61 | Computer Software-Desktop | Biggest investor in generative AI startup Open AI, whose ChatGPT users require Azure cloud services. Microsoft’s business AI assistant, Office 365 Copilot, will have general availability on Nov. 1. |
| Salesforce | (CRM) | 70 | Computer Software-Enterprise | Integrating conversational AI assistants within the user interfaces of all Salesforce apps. Expected to use a mix of subscription and consumption-based pricing. |
| Amazon.com | (AMZN) | 75 | Retail-Internet | Alexa smart assistant lags in chatbot technology. Cloud computing unit working with OpenAI rivals Anthropic, Hugging Face and Falcon 40B. |
New generative AI models process “prompts,” such as internet search queries, that describe what a user wants to get. Generative AI technologies create text, images, video and computer programming code on their own.
Companies will aim to boost productivity by developing customized AI for specific industries. Proprietary company data will be used to train AI models.
AI systems require massive computing power to find patterns and make inferences from large quantities of data. So the race is on to build AI chips for data centers, self-driving cars, robotics, smartphones, drones and other devices.
Will AI Startups Challenge Tech Giants
For chipmakers, analysts expect a market for “edge AI” — on-device processing of AI apps to emerge.
While “training” AI models is now the biggest market for chipmakers like Nvidia, the market will shift to “inferencing,” or running AI applications, in the long run.
What’s more, one key question for investors is whether tech industry incumbents will be the big generative AI winners. Or, will a new wave of AI startups eventually dominate? OpenAI has told employees its now on an annual revenue run-rate of $3.4 billion, up from $2 billion in January.
Large language models provide the building blocks to develop applications. Further, LLMs help AI systems understand the way that humans write and speak. Also, LLMs require training data for specific tasks. Companies with access to troves of data hold an edge.
OpenAI is part of a wave of LLM startups that includes AI21 Labs, Anthropic and Cohere. Anthropic introduced Claude 3, the newest version of its chatbot, and claimed its performance is better than OpenAI’s GPT-4.
However, OpenAI’s dominance faces a challenge from open-source LLMs. Musk’s xAI announced it will open source its Grok LLM, and released the source code for public use.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
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