Artificial intelligence (AI) is changing the face of the stock market’s leadership group.
Wall Street analysts love grouping stocks because it helps investors separate the market’s top performers from the rest of the pack. For instance, the FAANG acronym was coined by CNBC financial analyst Jim Cramer in 2017 to describe five of the largest technology companies at the time:
- Facebook, which now trades as Meta Platforms
- Apple
- Amazon
- Netflix
- Google, which now trades as Alphabet
Then in 2023, Bank of America analyst Michael Hartnett named a new group of technology stocks the “Magnificent Seven.” Each of them convincingly outperformed the benchmark S&P 500 index last year. These seven stocks also have something more important in common: Each company is developing artificial intelligence (AI) in its own unique way:
- Meta Platforms
- Apple
- Amazon
- Alphabet
- Microsoft (MSFT 1.84%)
- Nvidia (NVDA 4.97%)
- Tesla
However, the connection to AI might not be enough to keep this band together. Most of the Magnificent Seven stocks opened 2024 with more upside. The exception was Tesla, which plunged 23% in January alone. CNBC’s Cramer thinks Tesla should be booted from the Magnificent Seven, and Glen Kacher from Light Street Capital thinks the group needs to be entirely reconstructed.
Kacher has identified five stocks and named them the “AI 5.” Let’s take a closer look at all five and see why each could lead the market higher from here.
1. Nvidia
It should come as no surprise that any group of stocks named the AI 5 would include Nvidia. Its H100 data center GPU chip is the leading hardware choice among developers to build, train, and deploy their AI models. In early 2023 HSBC analysts estimated Nvidia had a 90% market share in that segment, and its financial results appeared to back that up.
In the recent fiscal 2024 third quarter (ended Oct. 29, 2023), Nvidia generated $18.1 billion in total revenue, which was up a whopping 206% from the year-ago period. Its data center revenue accounted for $14.5 billion of that, which marked an increase of 279%. Those incredible growth rates helped Nvidia stock surge 239% last year, and the upside momentum carried into 2024.
Nvidia is now gearing up for the wide release of its new H200 data center chip. When it comes to inferencing — which involves feeding an AI model real live data so it can make predictions — the H200 is up to twice as fast as the H100. Plus it consumes 50% less energy, so it’s far cheaper to run for operators of centralized data centers.
Considering Nvidia is struggling to keep up with demand, the strength in its business will likely continue throughout this calendar year. It certainly deserves its spot in the AI 5.
2. Microsoft
Microsoft is another dominant force in the emerging AI industry, but it’s playing to its historical strengths and focusing on the software side. Microsoft invested $10 billion in leading AI start-up OpenAI last year, which is responsible for the popular ChatGPT online chatbot.
Microsoft has since used OpenAI’s technology to integrate generative AI applications into its entire software suite, including the Windows operating system, 365 document suite, Bing search engine, Edge internet browser, and the Azure cloud platform. Copilot for 365, for example, allows users to rapidly create content in applications like Word, Excel, and PowerPoint, which boosts productivity, especially in corporate settings.
Azure OpenAI Service, on the other hand, delivers OpenAI’s latest GPT-4 models to Azure’s cloud customers so they can use the technology to develop AI applications for their own needs.
Microsoft recently surpassed Apple to become the most valuable company in the world, with a market capitalization of more than $3 trillion. It’s one of only a few companies successfully monetizing AI software already, and that could drive its next phase of growth.
3. Advanced Micro Devices (AMD)
Advanced Micro Devices (AMD 4.21%) makes some of the world’s most popular chips for computers, mobile devices, cars, and data centers. All eyes are on its new MI300 lineup of data center GPUs, which were designed to rival Nvidia’s industry-leading hardware, and it’s off to a great start.
The MI300 comes in two configurations. The MI300X is a pure GPU, whereas the MI300A combines GPU and CPU hardware to create the world’s first accelerated processing unit (APU) for data centers. The latter is the chip of choice for the new El Capitan supercomputer at the Lawrence Livermore National Laboratory, which is slated to be the fastest in the world when it comes online this year.
Tesla might also be using the MI300 soon to train its AI and autonomous self-driving models, according to CEO Elon Musk. Nvidia’s GPUs are the company’s first choice, but a lack of supply means it has to source chips from elsewhere too. AMD is an obvious choice for Tesla, given AMD chips already power the infotainment systems inside its electric vehicles.
AMD stock is off to a flying start to 2024 with a gain of 28% already. Investors will learn more about MI300 demand throughout the year, but the early signs make AMD a worthy member of the new AI 5.
4. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM 2.08%) is arguably the most important company in the chip industry. It manufactures more than half of the world’s chips, including the advanced GPUs designed by companies like Nvidia and AMD. Without TSMC, who knows where the AI industry would be right now?
The company’s revenue was down in 2023. It suffered from the supply glut of chips that began in 2022, as consumers trimmed their spending on big-ticket electronics in the wake of high inflation and rising interest rates. However, in the fourth quarter (ended Dec. 31) it saw 17% quarter-over-quarter growth in its high-performance computing segment as demand for AI chips ramped up. It also delivered 27% quarter-over-quarter growth in its smartphone segment, as companies like Apple transitioned to 3-nanometer chips, which lay the foundation for on-device AI.
Wall Street now expects TSMC’s revenue to grow by 22% in 2024 to $85 billion. Analysts are looking for a further 20% growth in 2025, taking the company’s revenue above $100 billion for the first time. Considering TSMC’s crucial role in manufacturing AI chips in all categories, its stock is likely a great bet going forward, and it certainly belongs in the AI 5.
5. Broadcom
Broadcom (AVGO 2.03%) probably isn’t at the top of many investors’ watchlists when it comes to AI, but the company is developing the technology in several different ways. Not to mention Broadcom stock has more than quadrupled over the last five years, so it’s worth paying attention.
Broadcom was founded in 1991, but it merged with Avago Technologies in 2016, which transformed the company. It’s now a conglomerate featuring the original Broadcom, Avago, semiconductor device supplier CA Technologies, cybersecurity provider Symantec, and cloud software developer VMware.
Broadcom is a leader in networking and server connectivity. It develops data center switches that determine how fast data travels from one point to another, and its latest Tomahawk 5 is an industry-leading product that is accelerating AI workloads. Plus, Symantec recently signed a deal with Google Cloud’s Vertex AI platform to deliver faster and more accurate cybersecurity solutions.
Broadcom closed its VMware acquisition last year, so VMware’s financials will be consolidated with the conglomerate from fiscal 2024 (which began in November 2023). Broadcom’s guidance suggests its revenue will soar 40% during fiscal 2024 as a result, so this overlooked stock might have plenty of growth left in the tank.
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