Title: Market Rebound in 2023: Top AI Stocks to Boost Your Portfolio
The tech-centric Nasdaq Composite experienced a significant rebound of 43% in 2023, largely driven by leaders in artificial intelligence (AI) technology. This rebound serves as a positive signal for the future potential of AI stocks in the long term. If you’re looking to add growth to your portfolio, focusing on profitable AI companies that dominate their industry is a great strategy. In this article, we’ll explore three noteworthy AI stocks that offer fair valuations and the potential for market-beating returns.
Nvidia (NASDAQ: NVDA) emerged as a top performer in 2023, with its stock skyrocketing by 238%. The company’s success can be attributed to the booming demand for chips capable of handling the massive data workloads required for AI training. Nvidia recently unveiled its H200 graphics processing unit (GPU) for data centers, which boasts even greater power than its predecessor, the H100. This innovation sets the stage for another year of robust growth.
The H200 GPU is specifically designed to meet the memory bandwidth requirements for training generative AI and large language models. This capability poses a potential threat to Advanced Micro Devices’ memory-heavy MI300 GPUs. Notably, major players like Amazon Web Services, Alphabet’s Google Cloud, and Microsoft Azure have already signed on as early customers to utilize the H200 in 2024.
With a long-standing reputation as the leading GPU specialist, Nvidia is expected to maintain its dominance in the market. Over the past four quarters, the company generated an astounding $19 billion in profit from $45 billion in revenue. Nvidia allocates nearly 20% of its annual revenue towards research and development, fueling continuous GPU innovation.
Analysts predict that Nvidia will earn $24 per share annually over the next two years. If the stock maintains its current price-to-earnings ratio of 65, this estimate could support a stock price of $1,560, presenting significant upside potential.
Despite experiencing a surge of over 100% in the first half of 2023, Tesla (NASDAQ: TSLA) faced a cooldown period in the second half of the year. While concerns lingered regarding near-term auto demand, the company’s software capabilities remained a hidden gem that the market overlooked.
Tesla is strategically navigating through one of the most challenging auto markets in over a decade, with rising interest rates adversely impacting electric vehicle demand. Consequently, the company witnessed a modest 5% year-over-year growth in automotive revenue during the third quarter.
However, Tesla’s long-term prospects remain promising. The company is highly profitable, boasting $11 billion in net profit over the last four quarters from $95 billion in revenue. This robust profitability fuels advancements in critical areas such as AI software, which opens up numerous avenues for long-term growth.
As Tesla deploys more self-driving vehicles on the road and collects substantial amounts of data, its software capabilities continue to progress rapidly. While the company currently monetizes its full self-driving software through additional fees, the broader implications of Tesla’s advancements in AI present a competitive advantage that could unlock new revenue streams. These advancements could potentially lead to profitable licensing deals with other car manufacturers and the expansion of Tesla’s addressable market through robotics.
Analysts anticipate Tesla to report $145 billion in revenue next year as the auto market recovers. If the stock maintains its current price-to-sales ratio of 8.6, this projection could result in a 65% stock increase over the next two years, surpassing market performance.
Google’s parent company, Alphabet, also emerged as one of the Magnificent Seven stocks that outperformed the market in 2023, with a remarkable 58% climb. Despite this impressive growth, Alphabet’s stock remains reasonably priced for new investors seeking an entry point.
Alphabet’s primary growth engine lies in its dominant presence in the digital advertising market. With billions of users utilizing services such as Gmail and YouTube, Google generates nearly $60 billion in advertising revenue each quarter. This vast revenue stream fuels considerable free cash flow, which Alphabet reinvests in essential technologies to enhance the value of its services for users.
AI plays a crucial role in practically all aspects of Alphabet’s operations. In 2023, the company established Google DeepMind, a dedicated team focused on developing AI systems for future products and services. Within the search domain, generative AI expands the range of questions users can ask Google, resulting in more relevant search results and subsequently driving revenue growth in advertising.
Alphabet experienced a growth slowdown in 2022 due to a weak advertising market. However, it made a strong recovery in 2023, with search revenue increasing by 11% year over year during the third quarter. Analysts are increasingly optimistic about Alphabet’s future outlook, consistently upgrading their revenue estimates for 2024 and 2025. Despite this, the stock continues to trade at a below-average valuation of 20 times this year’s earnings estimate.
Assuming an earnings-per-share estimate of $7.79 for 2025 and applying a price-to-earnings ratio of 25 (in line with the S&P 500 average), the stock could potentially reach $194 within the next two years. This projection represents a 46% return from the current share price, offering considerable potential for investors.
In conclusion, the AI market staged a remarkable rebound in 2023, with these three prominent stocks leading the way. Nvidia, with its cutting-edge GPU technology catering to the data-intensive demands of AI training, offers substantial upside potential. Tesla, despite facing short-term concerns, thrives on its profitable business model and AI software advancements. Finally, Alphabet’s dominance in digital advertising combined with its strong focus on AI positions it for future growth. As AI continues to evolve and revolutionize various industries, these stocks stand out as profitable investments with the potential to drive significant returns.
