AI Stocks

AI companies are some of the hottest stocks on the US markets with enormous returns

If you would have invested $1,000 in Nvidia stock on US Tax Day (April 15) in 2005, you would now own a stock worth $889,433. So where is the next Nvidia? Maybe here!

Why AI, why Now?

What many people don't realize is that AI has been used by large corporations for many years, but AI has been mostly hidden from public view. One of the most important developments in 2022 was the release of ChatGPT to the general public. That opened people's eyes to AI and propelled the stock market to rise even higher.

The Magnificent Seven

You may hear the term 'Magnificent Seven' or 'Mag 7' when referring to tech stocks. 'Magnificent Seven' is a reference to a 60s Western film, The Magnificent Seven, that depicts a group of seven gunmen hired to protect a small village from a group of bandits. In the world of finance, using the metaphor of a powerful group, the term references a group of seven high-performing and influential technology stocks.

Bank of America analyst Michael Hartnett coined the phrase in 2023 when commenting on the seven companies commonly recognized for their market dominance, their technological impact, and their changes to consumer behavior and economic trends. The companies are: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla.

Investors need to know the risks and challenges associated with these stocks. The dynamic nature of the technology sector, regulatory scrutiny, market saturation, and global economic factors like inflation and geopolitical tensions can affect their performance. Additionally, high market valuations bring lofty expectations, and any failure to meet these can lead to significant stock price corrections. On the other hand, the market performance of the Mag 7 has been astonishing, ranging from 105% growth to over 3100% in a five year period. Nvidia has risen to a market cap of over $3 trillion. surpassing Apple.

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Stocks to Watch

Compiled from Yahoo Finance and Sherwood and other investment sources.

Nvidia

Nvidia (NASDAQ: NVDA) is already one the biggest beneficiaries of AI, as its graphics processing units (GPUs) have become the backbone of the AI infrastructure buildout. Demand for its chips is insatiable, and it appears there will be no letup as large language models (LLMs) need ever-increasing computing power and thus GPUs to be trained on as they become more advanced. With its CUDA software platform long ago becoming the standard on which developers learned to program GPUs, Nvidia has attained a dominant share of the GPU market. Meanwhile, the company continues to advance its technology, accelerating its design cycle to once a year (from the previous two-year to three-year cycle). Their advanced technology and increasing market demand should allow Nvidia to keep its huge market share and continue to be one of the biggest AI winners.

Broadcom

For investors looking for the next big AI chip winner, Broadcom (NASDAQ: AVGO) tops the list of candidates. The company participates in the AI infrastructure buildout through its networking portfolio, which provides switches and network interface cards (NICs), as well as through helping customers build custom AI chips. The company is looking to grow and take share in the AI data center switching market where its Ethernet switches compete against Nvidia's InfiniBand technology. It touts that Ethernet technology is superior to InfiniBand in handling AI workloads and transferring data between GPUs. While both technologies have their pros and cons, this is a growing market that is becoming more important as GPU clusters become larger. Thus, there is a lot of potential upside for multiple players to benefit. Broadcom's biggest opportunity, though, is in helping customers develop chips designed for specific computing and power needs. The company has been adding a number of big customers in this area, and it should be a strong growth driver in the years to come.

Microsoft

Microsoft (NASDAQ: MSFT) was one of the first big tech companies to embrace AI and bring it to the mainstream following a large, increased investment in OpenAI, the maker of ChatGPT. Since then, its cloud computing unit Azure has been a big AI winner, as customers embrace its services to create their own AI agents and copilots. This has led to consistent growth from Azure, including 33% revenue growth last quarter. The company is investing heavily in expansion in order to keep up with demand. Microsoft is also in the early days of benefiting from AI within its software segment, where it has introduced several AI assistant copilots for its productivity tools within its Microsoft 365 offering. As these AI assistants advance and user adoption increases, the company has a huge opportunity in front of it. At a cost of $30 per month per enterprise user (with a Microsoft 365 subscription needed), the costs of the AI assistant in some cases can be as much as or even more than the cost of Microsoft 365 itself. While Microsoft has been an early AI winner, its biggest opportunities may still be ahead.

AppLovin

One of the biggest AI software winners has been AppLovin (NASDAQ: APP), which has seen astronomical growth since it launched its AI-powered adtech platform Axon 2.0. Since then, its adtech solution has become the go-to solution for mobile gaming companies to attract new customers and better monetize their games. While growth has been explosive since its launch, the company thinks it can continue to grow its gaming customer revenue by between 20% to 30% a year. However, the biggest opportunity for the company moving forward is expanding the use of Axon 2.0 beyond gaming customers into other segments. It just began piloting Axon 2.0 within the broader e-commerce sector and is seeing good early results. Meanwhile, AppLovin management believes the e-commerce vertical will become a meaningful revenue growth driver as early as next year. If the company can successfully expand Axon 2.0 beyond gaming, the stock should have a lot more upside in the years ahead.

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Palantir Technologies

Palantir Technologies (NYSE:PLTR) has emerged as a key tech stock investors have been remiss to not have owned during this recent rally. On a year-to-date basis, PLTR stock is up more than 300%, with a 225% gain seen over the past six months alone. Thus, while Palantir's rise heading into this year and for the first quarter of 2024 was impressive, it's the stock's amplified move higher in recent months that's caught many investors by surprise. The big data company, focused on providing tailored solutions for government organizations looking for data management and intelligence analysis tools, has benefited from very stable and consistent contract growth over time. The company's Q3 earnings highlighted a 54% rise in commercial revenue, fueled by strong demand for its AI code evaluation platform. This higher-margin commercial business, driven by robust corporate spending on such initiatives, could continue for some time. And as Palantir gobbles up more market share in this lucrative space, it's earnings growth (43% EPS growth this past quarter) could continue at this rate for a long time. Now, PLTR stock currently trades at around 150-times forward earnings, so this is a stock that's far from cheap. Even assuming the company's 43% EPS growth rate can continue, that's a PEG ratio of around 4.

Taiwan Semiconductor

Taiwan Semiconductor (NASDAQ:TSM) is a top chip maker focused on the development of state-of-the art chips via its core foundry business. The company essentially produces high-performance chips for the likes of Nvidia, AMD and others, becoming what many view as a macro play on overall chip growth over the long-term. Taiwan Semi is working on developing 2nm chips, which the market is expecting to see by 2025. Their 3nm chips, launched in Q3 last year, now contribute 30% of revenue. So, if demand for the latest and greatest chips materializes as many expect, there's plenty of growth acceleration on the horizon, expectations that are currently being baked into the company's multiple. TSM stock currently trades at around 23-times earnings The company has a 15%-20% CAGR projected growth rate moving forward. This growth is expected to mainly come from the company's fast-growing AI-related chips business, which is expected to grow at a much faster 50% annualized clip, and make up a mid-teens percentage of Taiwan Semi's overall revenue over time. If the company can grow its core AI-related business faster than the market anticipates, this is a stock that could go on a massive rally in the near future.

Alphabet

Alphabet (NASDAQ:GOOG) is the king of search globally, with its core Google business providing one of the greatest cash cows the market has ever seen. Alphabet continues to dominate this market, owning more than 90% global market share and continuing to provide incredible cash flow growth each and every year as online advertising spending continues to trend higher. Importantly, Alphabet's Google Cloud has become a key growth driver investors are increasingly focused on, and for good reason. This segment recently surpassed $11 billion in quarterly revenue and $1.9 billion in operating profit, providing the potential for the company to continue to grow its earnings at a double-digit rate over the next five years. The company continues to invest heavily in its home-grown AI solutions it's integrating within its search and cloud businesses. If these endeavors can propel earnings growth acceleration, the sky's the limit for this undervalued growth stock.

SoundHound

After finding early success within the automobile and restaurant verticals, SoundHound (NASDAQ: SOUN) is looking to become the world's leading AI-based commerce voice platform following its recent acquisition of Amelia. A conversational and generative AI platform, Amelia gives SoundHound a broader range of customers in industries such as healthcare, financial services, insurance, and retail. While the company has a lot of growth opportunities remaining in the auto and restaurant industries, the stock's true upside lies in the use of its technology across a wide range of industries, each with its own specific vocabularies and interactions. These can include making doctors' appointments or answering complicated questions related to a stock trade. If it can advance its AI voice platform to this level and serve a multitude of industries, the sky is the limit.

Other Stocks to Watch

The Mag 7 companies all have a large upside, but the largest upside belongs to ASML Holding (NASDAQ:ASML)..
C3.AI (NYSE:AI) C3.AI is a well-known AI software solutions firm that offers various business-oriented AI apps and platforms. A recently announced partnership with Microsoft boosted C3 stock by 25%.