AI, artificial intelligence, has come into its own in recent years. Machine learning technology has found its way into a wide range of day-to-day activities, from internet searching to marketing and advertising to just driving down the highway. Artificial intelligence promises to change the way that we interact with the world and with computers, and the launch of ‘generative AI,’ embodied in real-language chatbots like ChatGPT, shows just how close that promise is.
The emergence of any new technology brings with it an ever-proliferating array of opportunities, and AI is no exception. Tech firms all around the world are neck-deep in AI, from making the semiconductor chips that power the technology to developing the software that will interface between AI and us – to creating the new technologies that will build on machine learning.
While tech companies at all scales are gravitating to AI, the larger tech firms have a leg up. They’re huge to begin with, some with trillion-dollar market caps; they are already industry leaders – and they’ve been involved in AI from the beginning. The giant tech titans have been leading the market gains we’ve seen so far this year, making those gains partly on AI.
Market-leading positions and connections to a world-changing technology have helped put some of the tech giants on the Smart Score‘s ‘Perfect 10’ list. The Smart Score uses machine learning as well, to gather and collate the data behind thousands of publicly traded equities and assigns those stocks a simple score pointing toward likely future performance, based on 8 data-based factors.
Considering all of this, the ‘Perfect 10’ tech titans are a logical place to look for riding the market on the way to new highs. Let’s take a closer look at two of them.
The first stock on our list of ‘Perfect 10s’ is Nvidia, one of the world’s leading semiconductor chip firms. Nvidia built its reputation on the strength of its graphics processing units, GPUs, chips designed to run advanced graphics programs and beloved by both professional graphic designers and high-level gamers. This niche nicely preadapted Nvidia for the advent of AI, as the company’s GPUs are also capable of handling the high processing demands of AI computing.
Demand for AI-capable chips has been booming all year, and Nvidia has realized strong gains as a direct result – the stock is up over 226% year-to-date. It’s no surprise that Nvidia is a major supplier of GPU chips for OpenAI, the company that launched ChatGPT last November. OpenAI has been using Nvidia’s chips in its machine learning applications – ‘teaching’ its AI – since 2020, and has already indicated a need for another 10,000 chips to maintain ChatGPT going forward. This can only bode well for Nvidia, which is already one of the select few $1 trillion-plus companies in the stock market.
The rapid expansion of AI has led to solid beats compared to the financial expectations in Nvidia’s last financial release. In the company’s last quarterly report, for Q1 of fiscal year 2024, it showed total revenues of $7.19 billion, a total that was down 13% year-over-year but was also $669 million above the forecasts. The company’s earnings were also higher than had been anticipated; at $1.09 per share, the non-GAAP EPS beat the forecast by 17 cents per share. The company finished its fiscal Q1 with over $5 billion in cash and other liquid assets on hand, compared to $3.9 billion in in the prior year quarter.
Investors were also mightily impressed by Nvidia’s forward guidance. The chip maker is guiding toward $11 billion in fiscal Q2 sales, far above the $7.11 billion consensus figure. Hitting that guidance will equate to a 41% y/y revenue gain.
All of this – but especially the company’s strong link to AI and its ability to generate cash – brought Nvidia to the attention of 5-star analyst Chris Caso, from Wolfe Research. Caso writes of Nvidia’s attraction for investors, “There is now little investor debate about NVDA’s dominance of AI, or the potential growth rates. The main question is whether there is still room for the stock to move further, given the big move and elevated valuation – we think there is given NVDA’s strong FCF. We think it’s unprecedented to have a company growing this fast (30% 8-year CAGR, 35% 3-year CAGR), and still throw off this much cash (~2.2% FCF yield even after >200% YTD stock gain). That cash flow, coupled with NVDA’s dominant position in AI, keep us in the stock despite the move.”
Caso gives NVDA an Outperform (Buy) rating, and his price target, set at $570, implies the stock will gain another 22% in the year ahead. (To watch Caso’s track record, click here.)
The giant tech firms pick up plenty of reviews from Wall Street, and Nvidia has 32 recent calls on file – including 30 to Buy and 2 to Hold, for a Strong Buy consensus rating. The shares are priced at $467.5, and the stock’s $504.46 average price target suggests a 12-month appreciation of 8%. (See Nvidia’s stock forecast.)
The second AI-related stock on today’s list is Alphabet, the parent of Google and an array of other subsidiaries – many of which are tied directly into AI. For Google, of course, the connection is obvious – Google has been the dominant player in internet search for decades, and for much of that time has been using AI-powered algorithms to enhance its search modes. Google also uses AI in its digital advertising applications, which are the go-to for online marketing companies.
Alphabet’s other AI-related enterprises cover a range of niches, including AI research (DeepMind), drone-based local air-freight delivery (Wing), autonomous vehicles (Waymo), and YouTube, the web’s premier video search engine. Alphabet is also advancing its head-to-head competitor to ChatGPT, an AI chatbot called Bard. While Alphabet does not have a leading position in every AI niche, it’s a strong competitor – and the company’s long history with AI development gives it an edge in creating workable systems quickly.
All of this has powered Alphabet’s growth. Its attraction for investors has supported the stock price – and pushed the market cap up to $1.63 trillion, the third-highest among publicly traded firms.
The stock has also obviously benefited from strong financial results, such as those on display in the recent Q2 readout, which beat the forecasts all around. Top line revenues at $74.6 billion, beat expectations by $1.84 billion and grew 7% year-over-year, while the bottom-line EPS, at $1.44, was 10 cents per share over the estimates.
For Truist analyst Youssef Squali, Alphabet’s AI connection, amongst other elements, informs his bullish take. Explaining his stance, the 5-star analyst writes, “We remain constructive on GOOGL following stronger than expected 2Q23 results, reflecting faster recovery for Search and YT, and sustained momentum in Cloud as mgmt reigns in costs and focuses investments on the highest growth priorities. We expect to see further growth acceleration in 2H23 with margins improving, supporting a compelling case for the stock N/M term. LT, while questions about AI’s impact on Search advertising remain, we believe that GOOGL is at the forefront of this race and expect mgmt to continue to lean in, more assertive in the rollout of its AI initiatives and in how it communicates them.”
Squali goes on to rate the stock as a Buy, with a $160 price target pointing toward 21% share gains over the next 12 months. (To watch Squali’s track record, click here.)
There are 35 recent analyst reviews of Alphabet on file and they break down 30 to 5 favoring Buys over Holds, for a Strong Buy consensus rating. The shares have a current trading price of $132.58 with an average price target of $149.45, indicating a 13% one-year gain. (See Alphabet’s stock forecast.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
