As investor interest in artificial intelligence grows, numerous companies are now emphasizing their AI product roadmaps. However, identifying legitimate AI stocks that are already generating revenue from generative AI, such as Microsoft (MSFT) and Nvidia (NVDA), can be a daunting task for investors. The emergence of generative AI presents both risks and opportunities for companies like Google parent Alphabet (GOOGL).
Nvidia and Qualcomm play a crucial role in powering much of the world’s technology landscape. With 750 chipmakers involved in developing the core components of digital devices, competition in this sector has intensified significantly. These companies, along with various AI stocks, exert a significant influence on Wall Street, often resulting in substantial market price fluctuations. Therefore, it is essential for investors to grasp the key aspects of this dynamic industry.
Amid the rise of generative AI, which has the capability to produce text, images, sounds, and video autonomously, exercising caution amidst the hype is advisable.
In general, investors should focus on AI stocks that leverage artificial intelligence to enhance their products or gain a competitive edge.
AI Stocks: Infrastructure and Productivity
Microsoft stands out as a major investor in the generative AI startup OpenAI, a leader in training models for generative AI. Additionally, Microsoft has made strategic investments in Mistral, a company based in France.
The top AI stocks encompass a diverse range of entities, including chipmakers, software firms, cloud service providers, and technology giants that integrate AI tools across various applications.
Goldman Sachs highlights the significance of “infrastructure” related AI stocks, such as semiconductors, cloud computing providers, and data center computing equipment. The future is expected to witness a shift towards AI “enabled” companies that incorporate AI into their business models to drive revenue growth. Subsequently, companies utilizing AI technology to enhance productivity will also gain prominence.
Research by 650 Group projects a robust 48% compound annual growth rate for the AI computer server market from 2023 to 2028, with an anticipated market value of \(286 billion by 2028. Similarly, the AI networking market is forecasted to reach \)25 billion by 2028, up from $9 billion in 2023.
From a technical analysis perspective, certain AI stocks are currently forming new bases.
Arista Networks (ANET) holds the 12th position on the IBD 50 roster of growth companies, with ANET stock registering a 26% increase in 2024.
The shares of Astera Labs (ALAB), a company specializing in data center networking chips and software, surged following its initial public offering on March 20. Astera Labs is featured as the New America highlight in IBD this week.
Super Micro Computer (SMCI), a prominent player in the AI stocks space, recently joined the S&P 500 index on March 18.
NVDA Stock Performance in 2024
Nvidia, a key player in the AI stocks realm, has witnessed an 82% surge in its stock value in 2024, building on a remarkable 239% increase from the previous year. The valuation of Nvidia has drawn comparisons to Cisco Systems (CSCO) during the dot-com bubble era.
During its GTC conference on March 18, Nvidia introduced the new Blackwell family of processors as a successor to the existing Hopper model, which has faced supply constraints. The forthcoming Blackwell processors are scheduled for release later this year. Nvidia faces escalating competition from Advanced Micro Devices (AMD).
Broadcom (AVGO) hosted the “Enabling AI Infrastructure” event in San Jose, Calif., on March 20, announcing a new customer in the form of a “hyperscaler in consumer AI.”
In parallel, the Nasdaq experienced a 43% surge in 2023, largely driven by the buzz surrounding AI stocks.
Most enterprise software companies are not expected to significantly monetize generative AI, or “conversational AI,” until late 2024 or 2025, according to analysts.
Salesforce (CRM) unveiled its Einstein 1 Studio, a collection of low-code AI tools designed to customize Einstein Copilot and embed AI functionalities into Salesforce applications.
Several other software firms are currently exploring strategies to monetize AI products effectively, including ServiceNow (NOW), Adobe (ADBE), and Workday (WDAY).
AI Stocks: Cloud Computing Giants
Major players in the cloud computing domain, such as Amazon.com (AMZN), Microsoft, and Google, offer AI services to corporate clients.
The demand for AI chips has predominantly emanated from cloud computing giants and internet-based companies. Meta Platforms, the parent company of Facebook, recently announced its plans to conclude 2024 with 350,000 Nvidia H100 chips.
However, analysts anticipate the emergence of a market for “edge AI,” focusing on on-device processing of AI applications. While the current market emphasis lies on “training” AI models, the long-term trend is expected to shift towards “inferencing,” which involves executing AI applications.
Qualcomm (QCOM) is actively developing Snapdragon AI chips for Android smartphones and various applications within the “internet of things” ecosystem. Another notable player in the AI chip segment is ARM Holdings (ARM).
AI Stocks: Apple’s Strategic Moves
Apple (AAPL) achieved a market valuation exceeding $3 trillion in 2023, despite lacking an immediate response to ChatGPT. However, the tide may turn in 2024.
Reports suggest that Apple is in discussions with Google regarding the licensing of its “Gemini” artificial intelligence training model for potential integration into iPhones.
AI technology relies on computer algorithms to replicate human learning capabilities, interpret patterns, and make predictions.
While machine learning historically focused on predictive models derived from existing data, the recent surge in interest has prompted companies to explore generative AI initiatives. Investors are keen on observing tangible revenue growth resulting from these exploratory AI projects.
AI Stocks: Industry-Specific Insights
Diverse industries are expected to leverage AI to enhance productivity and efficiency. Companies will likely develop customized AI solutions tailored to specific sectors, utilizing proprietary data for training AI models.
The development of AI systems necessitates substantial computing power to analyze vast datasets and draw meaningful insights. Consequently, there is a race to design AI chips catering to data centers, autonomous vehicles, robotics, smartphones, drones, and other devices.
Foundation Models and the AI Landscape
A pivotal question for investors revolves around the dominance of tech incumbents in the generative AI space versus the potential rise of new AI startups.
Large language models (LLMs) play a crucial role in facilitating the development of AI applications. These models enhance AI systems’ understanding of human language patterns, with training data tailored to specific tasks. Companies with access to extensive datasets hold a competitive advantage in this domain.
OpenAI represents a cohort of LLM startups, including AI21 Labs, Anthropic, and Cohere. Anthropic recently introduced Claude 3, its latest chatbot iteration, boasting superior performance compared to OpenAI’s GPT-4.
However, OpenAI’s market dominance faces a challenge from open-source LLMs. Musk’s xAI recently announced the open-sourcing of its Grok LLM, making the source code available for public use.
Meta Platforms and IBM (IBM) collaborated with 40 other entities to establish the AI Alliance on Dec. 5. This industry consortium aims to champion open-source AI models, countering proprietary systems from the likes of OpenAI and Google. Notable members of the AI Alliance include Intel (INTC), AMD, and Oracle (ORCL).
For instance, Hugging Face, an open-source community, provides tools enabling users to build LLMs. Recently, Hugging Face secured $235 million in a Series D funding round, with investments from industry giants like Google, Amazon, Nvidia, Intel, Qualcomm, IBM, and Salesforce.
Amazon announced plans to invest up to $4 billion in Anthropic, a direct competitor to OpenAI. Amazon holds a minority stake in Anthropic, which will leverage Amazon’s cloud services.
Monetizing AI Solutions
Enterprises are projected to allocate over $40 billion globally towards generative AI solutions in 2024, reflecting a 106% surge from the previous year, as per forecasts by International Data Corp. This expenditure encompasses software, hardware, and business/IT services.
IDC anticipates the market to reach $151 billion by 2027, expanding at an average annual rate of 86%.
Analysts foresee Microsoft’s Copilot AI software tools, particularly the Office 365 Copilot, driving revenue growth in 2024. Microsoft introduced Copilot AI software tools with pricing exceeding expectations, set at $30 per user monthly.
Adobe commercially launched its Firefly generative AI tools last year. Price adjustments related to the integration of Firefly tools into cloud products became effective on Nov. 1.
During the Dreamforce customer conference, Salesforce unveiled new generative AI initiatives. However, the company refrained from outlining financial objectives during the event. UBS projects a modest 1% revenue increase for CRM stock from generative AI in fiscal 2025, commencing in February.
AI Stocks and Market Dynamics
Venture capitalist Marc Andreessen famously remarked on how “software is eating the world” by revolutionizing industries through automation. Similarly, artificial intelligence is poised to reshape the software landscape.
For companies seeking a competitive edge in AI, continuous investments in computing, networking, and data center infrastructure are imperative.
Some analysts view Arista Networks (ANET) as a promising long-term AI investment, given the escalating demand for computing power and network bandwidth in internet data centers to process AI workloads efficiently.
Furthermore, Broadcom and Marvell Technologies (MRVL) are noteworthy AI chip manufacturers to monitor. While Broadcom anticipates a twofold increase in AI-related sales this year, other segments of its business are experiencing deceleration.
Cybersecurity firms are also attracting attention within the AI stocks landscape, including Palo Alto Networks (PANW), CrowdStrike, and Cloudflare (NET).
As software companies integrate generative AI tools into their products, customers are expected to ramp up spending on software. For instance, TD Cowen projected a substantial surge in generative AI software spending from \(1 billion in 2022 to \)81 billion in 2027, reflecting a five-year compound annual growth rate of 190%.
Venture Funding in AI
Venture capital funding is pouring into AI startups, underscoring the industry’s growth potential.
Inflection AI recently secured \(1.3 billion in a funding round led by Microsoft and Nvidia, valuing the company at \)4 billion. Inflection AI’s flagship LLM application, Pi, serves as a personal assistant.
Similarly, Anthropic announced a $450 million funding round last year, spearheaded by Spark Capital. Notable participants in the funding round include Google, Salesforce (CRM), Sound Ventures, and Zoom Video Communications (ZM).
Andreessen Horowitz led a \(150 million funding round for Character. AI, catapulting the startup’s valuation to over \)1 billion.
AI startup Adept raised \(350 million, also achieving a valuation exceeding \)1 billion. Adept’s AI model, designed to interpret text commands into actionable sequences, draws inspiration from human-computer interactions.
Moreover, AI chip startups are attracting substantial venture capital investments, intensifying competition for Nvidia. Notable players in the AI chip startup arena include Cerebras, Sambanova, and Graphcore, alongside Groq, Hailo Technologies, Kinera, Luminous, Ateris IP, and Mythic.
Tech Giants and AI Dominance
The proliferation of AI applications across facial and voice recognition technology, medical diagnostics, algorithmic trading, and automated customer service bots underscores the widespread adoption of AI. Major tech corporations are spearheading AI initiatives across various domains.
In e-commerce, Amazon plans to integrate ChatGPT-style search functionality into its online platform. The company has leveraged AI extensively to personalize online retail experiences and recommend products to visitors, alongside deploying robotics and AI in its fulfillment centers.
During the Google I/O 2023 developers event, Alphabet showcased the integration of generative AI across its ecosystem, spanning search, maps, Workspace, photos, cloud computing, and Android devices. Google also unveiled its ad strategy amidst the rising prominence of generative AI at Google Marketing Live on May 23.
AI tools play a pivotal role in Meta Platforms’ core business and its foray into the metaverse. Meta introduced the AI Research Supercluster, an artificial intelligence supercomputer leveraging Nvidia chips, to support its metaverse initiatives.
Furthermore, Meta unveiled plans to develop custom AI chips for its data centers, with the Meta Training and Inference Accelerator (MTIA) slated for release in 2025.
Top AI Stocks and Software Market Dynamics
The intensifying competition in generative AI underscores the evolving landscape of AI technologies.
Atlassian recently introduced “Atlassian Intelligence” at a user conference, integrating OpenAI and LLM technology across its cloud products.
Snowflake (SNOW) and startups like Databricks aim to disrupt the vector database market with rapid analysis of “unstructured data” sourced from sensors. Potential applications include real-time video analysis.
Moreover, AI stocks to monitor encompass information technology services firms such as IBM, Accenture (ACN), and Epam Systems (EPAM). Accenture has been actively acquiring AI startups to bolster its technological capabilities.
IBM continues its acquisition spree, incorporating artificial intelligence companies like Databand.ai, Turbonomic, ReaQta, MyInvenio, and WDG Automation.
Bank of America analyst Jason Kupferberg anticipates a gradual revenue uptick for IT services vendors from generative AI solutions, as enterprises progress from initial data readiness stages to implementing ambitious AI solutions.
For the latest updates on artificial intelligence, cybersecurity, and cloud computing, follow Reinhardt Krause on Twitter @reinhardtk_tech.
