Many investors have flocked to artificial intelligence (AI) stocks in recent years to capitalize on the growth of generative AI platforms like OpenAI’s ChatGPT. That bull run pushed many tech stocks higher — even as inflation, high interest rates and other macroeconomic headwinds hit other, less resilient sectors.
But as the first half of 2024 ends, some investors might wonder whether AI’s historic rally will run out of steam. I think investors should be a little more selective about their AI Actionsbut three of the most obvious pieces — Nvidia (NASDAQ:NVDA), Super microcomputer (NASDAQ: SMCI)And Microsoft (NASDAQ:MSFT) — are still worth buying.
1.Nvidia
Nvidia is the world’s largest producer of graphics processing units (GPUs). The company once generated most of its revenue from the PC gaming market, but sales of data center GPUs have exploded in the past two years, becoming its largest business segment.
Growth has been fully piloted by the rapid expansion of the AI ​​market as Nvidia’s high-end GPUs are widely used to accelerate machine learning and AI tasks. All the world’s largest generative AI companies, including OpenAI, Microsoft and AlphabetGoogle is currently using its GPUs.
Nvidia now controls 88% of the discrete GPU market, according to JPR, and market demand for its chips continues to outstrip supply. As a result, analysts expect its revenue and adjusted earnings to grow 98% and 109%, respectively, in fiscal 2025 (which ends next January). Its stock still appears reasonably valued at less than 50 times forward earnings, and could rise further as the AI ​​market grows.
2. Super microcomputer
Super Micro Computer, also known as Supermicro, has carved out its own niche by producing high-performance liquid-cooled servers for demanding tasks. That’s why it wasn’t too surprising when Nvidia partnered with the company a few years ago and granted it access to its high-end data center GPUs before many of its biggest competitors.
Nvidia’s support has allowed Supermicro to claim a 10% share of the AI ​​server market. Bank of America expects its share to increase to 17% over the next three years as the overall market grows by 150%.
Supermicro already generates about half of its revenue from AI servers, but that percentage is expected to continue to rise as it gains ground against larger server makers and diversifies its business with new AI servers powered by Advanced microsystems‘cheaper chips.
For 2024, analysts expect Supermicro’s revenue and earnings to grow 110% and 102%, respectively. These are incredible growth rates for a stock that trades at just 23 times forward earnings, so it could still have plenty of room to grow.
3. Microsoft
Microsoft has become a growth stock again over the past decade by expanding its cloud-based services and Azure, which has become the second largest cloud infrastructure platform in the world after Amazon Web Services (AWS). It also became the largest investor in OpenAI and later integrated the startup’s generative AI tools into Azure, its Bing search engine and other cloud services.
The expansion of this AI ecosystem has driven Azure’s growth and broadened its competitive advantage against Google in the search and advertising markets. The company also acquired Activision Blizzard last year to strengthen its Xbox gaming business and attract more gamers to its subscription-based Game Pass and Cloud Gaming ecosystems.
Microsoft’s broader diversification allows it to take advantage of growth in cloud, AI, and gaming markets in a balanced way. Analysts expect the company’s revenue and adjusted earnings to grow 14% and 13%, respectively, in fiscal 2025 (which ends next June). Its stock may not look cheap at 34 times forward earnings, but its strengths should justify its higher valuation.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Leo Sun has positions at Amazon. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Bank of America, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) Stocks to Buy in June 2024 was originally published by The Motley Fool
