Title: Three Promising AI Stocks Set to Outperform Big Tech Giants
Technology stocks made a remarkable performance in the first half of the year, outpacing the broader market. However, sustaining this rally might prove challenging, and investors are now in search of tech stocks poised to benefit from the growth of artificial intelligence (AI).
In the first half of the year, seven tech stocks dominated the market: Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. Yet, many experts question the sustainability of this narrow rally.
The valuations on those leaders are starting to get a little bit stretched, says Jason Pride, Chief Investment Officer of private wealth at Philadelphia-based wealth manager Glenmede. I suspect there is going to be some combination of an equalization between those valuations and a lower valuation for the overall marketplace.
However, there are three companies that could buck this trend and continue delivering tangible AI results. Microsoft, Twilio, and Zscaler stand out as promising options for investors.
Investors looking to stick with leading stocks have reasons to believe Microsoft could sustain its growth. On the other hand, those seeking diversified tech exposure should consider software providers like Twilio and Zscaler, which have been incorporating AI features into their products and currently trade below their previous peaks.
According to a recent survey by J.P. Morgan, chief investment officers expect Microsoft to receive 66% of their cloud-based generative AI spending over the next three years. In contrast, Amazon and Alphabet’s Google are anticipated to receive 16% and 14%, respectively.
Although Microsoft’s valuation is not considered cheap at around 35 times its forward earnings, it compares favorably to Nvidia, which trades at approximately 56 times its forward earnings. Nvidia’s growth has been fueled by the AI frenzy, but its valuation puts it on par with the Nasdaq Composite’s overall valuation during the tech bubble of the early 2000s.
Microsoft has an advantage over its competitors when it comes to AI. Unlike Google, it does not face direct threats to its existing business, and it has shown a wider range of applications for the technology compared to Meta and Apple.
Wedbush analyst Daniel Ives believes that Microsoft is in a unique position to expand its total addressable market around cloud by 35%-40% in the coming years. Ives has set a target price of $375 for Microsoft, indicating significant upside potential from its current price of $339.
Looking ahead to the second half of the year, generative AI is expected to drive revenue growth for many companies. Pedro Palandrani, Director of Research at Global X, suggests that a fundamentals-driven rally will replace the multiple-expansion rally seen in the first half.
Zscaler and Twilio are identified by Palandrani as potential beneficiaries of this shift. Zscaler, a cybersecurity company, has already surged 31% this year but currently trades at less than half of its previous value. With boosted guidance for its current fiscal year and the introduction of new security features powered by generative AI, Zscaler appears to be turning a corner. Wall Street analysts have set an average target price of $169.41 for Zscaler. On the other hand, cloud-communications company Twilio has risen 31% this year but is still down around 85% from its peak in early 2021. Wall Street analysts’ consensus target price for Twilio is $63.40.
While tech stocks may struggle to replicate their first-half performance, this doesn’t mean investors should abandon the sector entirely. Instead, a more selective approach could yield positive results.
In conclusion, as the tech sector evolves and AI continues to play a dominant role, investors looking to capitalize on the growth should consider Microsoft, Twilio, and Zscaler. These companies offer unique opportunities for both those seeking leading stocks and those diversifying their tech portfolios. With the potential for generative AI to drive revenue growth, the second half of the year holds promising prospects for select tech stocks.
