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Best AI stocks to watch in January 2024


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Microsoft, Alphabet, Nvidia, Meta Platforms and Tesla could be the five best AI stocks to watch next month. These stocks are the five largest AI companies listed in the US.

ai stocksSource: Bloomberg
 

 Charles Archer | Financial Writer, London

Artificial Intelligence (AI) has been the investing theme of 2023. Indeed, almost all of the S&P 500’s gains in 2023 have come from just seven companies — the so-called ‘magnificent seven’ — all of whom are potentially riding the AI wave to some degree.

While this may be yet another bubble, Artificial Intelligence is arguably different to similar tech manias. It’s already in use across a wide variety of real-world applications, including in entertainment, social media, art, retail, security, sport analytics, manufacturing, self-driving cars, healthcare, and warehousing alongside dozens of other sectors.

Every Netflix recommendation, every supermarket rewards purchase, and every football match is analysed ever more relentlessly in order to provide more and better data. And while consumers have always understood — even peripherally — that AI was taking over more and more of the heavy lifting; the sector’s investment catalyst finally arrived earlier this year.

This catalyst is of course ChatGPT, the OpenAI-developed chatbot which garnered over 1 million users in just five days. It took Facebook 10 months, and Netflix three and a half years to hit the same milestone. ChatGPT now boasts over 100 million weekly active users, and investors are now considering whether the innovation could make careers across the spectrum entirely redundant.

From an investment perspective, interest rates are relatively high, and quantitative easing appears all but over for the foreseeable future. AI development is exceptionally expensive, and for every ChatGPT breakthrough, there are hundreds of costly failures.

Therefore, the best AI stocks to watch could be predominantly the larger blue chips — which also helps to diversify any investment in the event that their AI projects fail. However, it’s also worth noting that some commentators consider the large US stocks are inside an AI bubble that will eventually pop.

And remember, past performance is not an indicator of future returns. While the following are the largest AI-focused companies stateside, Apple and several others are excluded because analysts disagree on whether they qualify as AI companies.

Best AI stocks to watch

Microsoft (NASDAQ: MSFT)

Microsoft is the original global computing power, so it makes sense that the US behemoth tops the list of the best AI stocks to watch. The company already had a strong relationship with OpenAI prior to the ChatGPT launch and has invested $13 billion into the company since 2019.

This remains a symbiotic relationship — Microsoft is allowing OpenAI access to its cloud centres to increase ChatGPT’s computing power, while native search engine Bing has incorporated the chatbot into its functions in an attempt to steal Google’s overwhelmingly dominant market share.

With OpenAI still reportedly planning a $86 billion IPO after the return of CEO Sam Altman, Microsoft could also soon see a direct return on its investment.

In Q1 results, revenue rose by 13% to $56.5 billion. CEO Satya Nadella enthused that ‘with copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers.’

Market Capitalisation: $2.77 trillion

Alphabet (NASDAQ: GOOGL)

Google parent Alphabet may control 84% of the global search market share — but Yahoo was once king of search too. While Alphabet laid off thousands of employees in 2023, it’s launched its own rival chatbot, Bard.

Bard runs on Google’s LaMDA programming, which has been in development since 2021. While there have been accusations of rushing Bard out to compete with ChatGPT, the titan should soon smooth out the issues.

It’s worth noting that AI is already used across many of Google’s current functions. And it’s got at least two more AI-focused projects; its coding-focused Generative Language API, and DeepMind which it acquired in 2014.

In Q3 results, CEO Sundar Pichai noted the ‘product momentum this quarter, with AI-driven innovations across Search, YouTube, Cloud, our Pixel devices and more.’ Revenue increased by 11% year-over-year to $77 billion.

Nvidia (NASDAQ: NVDA)

Nvidia is well-known as one of the world’s most valuable chipmakers, used in electronics ranging from smartphones, to cars, to high-end computing. Nvidia shares have risen by 235% year-to-date to $480, leaving the company with a sky-high price-to-equity ratio of 63 — and yet recent quarterly earnings saw yet another beat.

And Nvidia’s most advanced deep learning chips might mean that the NASDAQ company is still undervalued. They’re already in use at clients such as Alphabet and Facebook owner Meta to power both internal and user facing AI applications.

As AI becomes ever more mainstream, demand for these chips is surging, and importantly, there is a high economic barrier to entry — Nvidia has a wide economic moat surrounding its market position as the ‘bricks and mortar’ AI choice. Indeed, its chips are so advanced that they are subject to export controls in some instances from the US.

Q3 results saw Nvidia’s revenue rise by a whopping 206% year-over-year and 34% quarter-on-quarter to $18.12 billion — with CEO Jensen Huang nothing that ‘NVIDIA GPUs, CPUs, networking, AI foundry services and NVIDIA AI Enterprise software are all growth engines in full throttle. The era of generative AI is taking off.’

Market Capitalisation: $1.24 trillion

Meta Platforms (NASDAQ: META)

Meta Platforms, owner of Facebook, WhatsApp and Instagram, has enjoyed an excellent resurgence in 2023 — rising by 176% year-to-date to come close to its all-time high.

This ‘family of apps’ saw monthly active users rise by 7% year-over-year to 3.96 billion people during Q3, representing more than 50% of the world’s population. The tech titan has strongly benefitted from CEO Mark Zuckerberg’s ‘year of efficiency,’ with headcount decreasing by 24% over the past year to 66,185 people on 30 September 2023.

For context, Meta has been hit by a wave of headwinds; rising rates, falling advertising spending, TikTok competition, and Apple’s 2021 operating system update — alongside huge spending on the Metaverse which has yet to translate into profits. And for balance, the company still faces lawsuits alleging its products are both addictive and harmful to children. Further, virtual reality remains a niche market despite the heavy spending on the sector.

In Q3 results, Meta saw revenue rise by an impressive 23% year-over-year to $34.15 billion, while costs and expenses fell by 7% to $20.4 billion.

Market Capitalisation: $886 billion

Tesla (NASDAQ: TSLA)

Tesla is the original EV trailblazer, and despite the legal and media troubles of CEO Elon Musk, its advancements in artificial intelligence could see the auto company rise once again to the giddy highs of late 2021.

Indeed, its share price has already recovered by 133% year-to-date as it eyes possible expansions in India and Europe — though the recent catalyst is the long-awaited Cybertruck launch, which could drive significant further growth through 2024.

Fully autonomous driving is the long-term goal, with the company planning to launch a robot taxi service soon. It’s also developing Optimus — a humanoid robot which Musk thinks could become more valuable than Tesla’s auto operations in time. However, economic slowdown in China could cause short-term profitability issues in 2024.

Market Capitalisation: $801 billion

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*Based on revenue excluding FX (published financial statements, October 2021).

 
 

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