The dazzling ascent of artificial intelligence stocks has elicited both excitement and skepticism. Microsoft (MSFT) and Nvidia (NVDA), among the industry’s front-runners, are confronting the towering expectations of investors. For behemoths like Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META), the surge of generative AI presents both formidable risks and enticing opportunities.
In the wake of generative AI—capable of producing text, images, and video—the burgeoning hype invites a measure of caution. Numerous companies suddenly flaunt ambitious AI product roadmaps. As a general rule, investors should seek out stocks of firms leveraging AI to enhance products or carve out a strategic advantage.
The crème de la crème of AI stocks includes not just software companies and chipmakers, but also cloud computing service providers and technology giants. With increased capital expenditure from cloud computing giants, a pressing question looms: how much additional AI-related revenue will be generated?
It’s evident that AI stocks are under a magnifying glass like never before. A Bank of America report succinctly states, “We expect AI to shift from a ‘tell me’ to a ‘show me’ narrative, with any mismatch between investments and revenue generation subject to intense scrutiny. Companies increasing capital expenditure without rapid monetization could find themselves vulnerable.”
Nvidia’s High-Stakes Earnings
Nvidia, a bellwether for AI stocks, is set to release its second-quarter earnings on August 28. The anticipation is palpable. Analysts forecast that the company’s earnings per share (EPS) will soar 138% to 64 cents, with revenue skyrocketing 112% to $28.6 billion. Christopher Rolland of Susquehanna notes, “While another strong report is expected, it’s crucial for the Blackwell ramp storyline to sustain further stock upside.”
Nvidia’s stock has already surged 159% in 2024, after an impressive 239% increase last year. The stock has experienced volatility, pulling back from a 52-week high of 140.76 set on June 20. This market correction has affected other leading tech stocks as well, yet Nvidia remains a key component on the IBD Leaderboard.
In the AI Ethernet networking arena, Nvidia and Arista Networks (ANET) are going head to head. Arista delivered robust second-quarter results, with its stock appreciating 51% in 2024. As tech giants ramp up their spending on data center infrastructure, including AI chips and servers, the stakes are higher than ever. Google, Microsoft, Meta Platforms, and Amazon saw a capital expenditure boom in the June quarter.
While semiconductor companies have generally outperformed their software counterparts in the AI sector, data analytics software maker Palantir (PLTR) bucks this trend with an 89% rise in stock value this year.
The Microsoft and Apple Effect
Microsoft, the largest investor in generative AI pioneer OpenAI, saw its Azure cloud-computing growth fall short of Wall Street expectations in fiscal Q4. Generative AI “Co-Pilots” have yet to significantly boost Microsoft’s Office 365 business, according to analysts.
Arista stock currently holds the number 13 spot on the IBD 50 roster of growth stocks, with Palantir trailing closely at number 14.
At Apple’s recent Worldwide Developers Conference (WWDC), the company announced plans to integrate OpenAI’s ChatGPT into the Siri voice assistant and iOS 18. The burning question is whether Apple’s new “Intelligence” features will trigger a supercycle of iPhone 16 upgrades in late 2024 and 2025. These AI features will be exclusive to the iPhone 15 Pro/Pro Max and forthcoming iPhone 16 models, with a gradual rollout expected into 2025. Apple’s strategy could significantly influence the demand for iPhone 16 models.
Demand for AI chips is primarily driven by cloud computing giants and internet companies. Advanced Micro Devices (AMD) also exceeded Q2 consensus estimates, signaling robust market conditions. Other notable AI chipmakers include Broadcom (AVGO), Qualcomm (QCOM), ARM Holdings (ARM), and Marvell Technologies (MRVL).
Enterprise Software and AI Monetization Challenges
Enterprise software titan Salesforce (CRM) will report its Q2 earnings on August 28. So far, the company’s outlook on AI monetization has been lackluster. Conversely, ServiceNow (NOW) gained traction with its promising Q2 earnings and outlook.
Monetizing AI-related products remains a conundrum for most sizeable application software companies. Some analysts suggest that meaningful revenue streams from generative AI won’t be materialized until late 2025. Many U.S. firms are focused on custom AI software development projects, which will take time to commercialize.
A Sneak Peek into the Enterprise AI Market
AI technology relies on computer algorithms striving to mimic human learning, pattern recognition, and predictive abilities. Historically, machine learning was limited to models that processed data to make predictions based on existing patterns. Corporate spending on AI projects was modest as companies considered the return on investment.
Industry Leaderboards and Sector Dynamics
Companies like Nvidia (NVDA), CrowdStrike (CRWD), Arista Networks (ANET), Microsoft (MSFT), Salesforce (CRM), and Amazon (AMZN) each bring unique AI angles to the table, be it chip manufacturing, security, networking, or software applications.
The rise of new generative AI models capable of processing “prompts” is revolutionizing sectors from internet searches to custom AI solutions. These technologies aim to amplify productivity through tailored AI applications for specific industries, utilizing proprietary data for model training.
The Race for AI Dominance
A burgeoning market for on-device “edge AI” processing is anticipated, especially for applications requiring massive computational power for detecting patterns and deriving insights from vast datasets. The competition to build AI chips for diverse applications such as data centers, autonomous vehicles, and drones is heating up.
The key question for investors remains: will the tech industry’s longstanding giants dominate the generative AI landscape, or will a new crop of AI startups steal the limelight? OpenAI’s recent milestone of a $3.4 billion annual revenue run-rate points to the disruptive potential of AI startups.
As AI continues to evolve, companies possessing access to vast data repositories will possess a competitive edge. Rising stars like AI21 Labs, Anthropic, and Cohere are gaining traction, while open-source models like Musk’s xAI Grok LLM present new challenges to established players.
In the relentlessly evolving world of AI, the only constant is change. Keeping a close eye on innovation and strategic execution will be key for investors looking to capitalize on this dynamic market.