The artificial intelligence buzz has taken the world by storm. However, only a few stocks have shown tangible revenue benefits from AI in the current market. Thus, investors must diligently separate the best AI stocks from the pretenders.
According to analysts, the AI revolution is just beginning. Dan Ives of Wedbush predicts it will be the fourth industrial revolution. He draws a parallel to the emergence of the internet in 1995 and expects a secular growth cycle. Notably, AI could revolutionize multiple industries and enterprises are showing increased use cases.
Some industries have been using AI for a while. For instance, Google has applied AI for several years to improve its search results. Another early adopter of AI has been the cybersecurity industry. Companies in the industry have been leveraging AI for threat detection. These successful applications highlight the potential for AI in other industries.
After a great start for generative AI players in 2023, more upside lies ahead. The technology will drive investment and growth in chips, systems and software. Below are some of the best AI stocks to buy for 2024.
Nvidia (NVDA)
Semiconductor stocks have gotten off to a rocky start in 2024, with the VanEck Semiconductor ETF (NASDAQ:SMH) flat year-to-date. However, Nvidia (NASDAQ:NVDA) is bucking the trend and outperforming the index. Unlike other semiconductor stocks suffering from fears of a weak auto market, analysts expect its end markets to remain robust.
Primarily, the company provides advanced graphic processing units for data centers and gaming. The generative AI boom has caused a surge in demand for its chips due to their suitability for AI applications. Notably, the company has a monopoly in data center AI chips and will dominate the market for several years.
So why is NVDA stock one of the best AI stocks after its 200% gain? According to Bank of America’s (NYSE:BAC) Vivek Arya, generative AI will be a growth theme for over a decade. It will spur a data center upgrade cycle and investments in software and systems.
Since Nvidia has the best AI chips, the analyst sees more upside to Nvidia numbers. He projects that Nvidia will generate over $100 billion in free cash flow over calendar year 2024 and 2025. Additionally, he expects impressive 50% free cash flow margins.
Besides, the analyst expects more upside from new products. Nvidia plans to unveil its recent AI advancements at CES 2024. Per its product roadmap, the company will release its GH200 Grace Hopper and B100 in 2024. These new products will maintain Nvidia’s competitive advantage. Also, they will increase revenue growth due to their higher average selling prices.
Although Nvidia was one of the best AI stocks in 2023 and gained over 200%, more upside awaits. Generative AI has triggered a new investment cycle in the data center, spurring demand for advanced AI chips.
Vertiv Holdings (VRT)
Vertiv Holdings (NYSE:VRT) is another play on the growth of AI. The company manufactures power management and cooling systems for data centers. It provides global data center customers with power and thermal management, IT systems and infrastructure solutions.
The rise in AI means more data, storage needs, and processing power. Due to large AI datasets and heavy processing, modern high-density data centers use more power and are prone to overheating. Thus, these data center servers need a reliable cooling system. That’s where Vertiv comes in with its power management, thermal management and cooling solutions.
The company continues to enjoy solid demand for its liquid cooling and power distribution solutions applicable to high-density GPUs. Analysts project a 24.4% CAGR for these cooling solutions globally over the next five years. These trends concur with financial reports, with management stating in Q3 2023 comments that they expect more growth from AI. Specifically, they see an acceleration in the data center market in 2024.
Vertiv acquired CoolTera Ltd, a critical digital infrastructure and continuity solutions provider, in December 2023 to bolster its position. The acquisition will strengthen Vertiv’s high-density cooling portfolio and improve its offering to global data center customers.
Due to robust demand, management projected a strong finish to 2023, with sales between $6.875 and $6.895 billion, a 22% year-over-year growth. Moreover, the company is returning capital and has a $3 billion share repurchase authorization. Vertiv is ready for AI with its comprehensive end-to-end data center power and thermal management solutions portfolio.
Micron Technology (MU)
One of the major beneficiaries of AI has been memory companies. Large language models train on huge datasets, requiring a lot of memory and storage. This will be a tailwind for Micron Technology (NASDAQ:MU), one of the key players in the memory market.
Since AI projects require more memory, demand for Micron’s high bandwidth products is surging. In the Q1 fiscal year 2024 earnings call, management highlighted that generative AI will be a growth tailwind. “Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time,” noted CEO Sanjay Mehrotra.
The company launched its HBM3 product to capture the anticipated higher demand from AI and accelerated computing end markets. The product has received high customer reviews due to its better performance and lower power consumption than competing products. As a result, several analysts have upgraded MU stock, pointing to this tailwind.
BMO has an “outperform” rating and a $90 price target. Its analysts have raised 2024 estimates, noting that demand from AI will be robust. Similarly, Bank of America’s Vivek Arya is confident about AI tailwinds. He notes that Micron is gaining momentum in AI servers and will likely be included in Nvidia’s H200.
In 2024, generative AI will move to consumer devices such as laptops and mobile phones. Micron is well-positioned through its portfolio to capture this memory and storage market. Considering these tailwinds, it is one of the best AI stocks to buy.
— Charles Munyi
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Source: Investor Place