For investors interested in the artificial intelligence (AI) sector, 2024 is shaping up to be a pivotal year. So it’s high time to build your portfolio for the new year, and you don’t have to do it alone.
Three Motley Fool contributors came together to outline their best AI investments for the new year.
In the resulting discussion, you’ll learn about three exceptional AI stocks with market-beating prospects in 2024 and beyond. International Business Machines (NYSE:IBM) has made a strategic pivot to AI and cloud computing. Nvidia (NASDAQ:NVDA) is a pioneer in specialized hardware and generative AI systems. ASML Securities in portfolio (NASDAQ: ASML) forms the backbone of AI chip manufacturing.
These companies not only represent the pinnacle of AI innovation, but also offer unique investment opportunities.
Don’t underestimate this AI pioneer’s ability to shine
Nicolas Rossolillo (Nvidia): This may seem like a “too easy” choice, even a stretch, but after Nvidia’s latest earnings update, there could be plenty of room for the pioneer of generative AI systems to climb higher over the course of the new Year. How so?
In the fiscal 2024 third-quarter earnings call (for the period ending October 2023), revenue soared 206% from a year earlier to $18.1 billion, driven by the data center segment (where most sales of generative AI chips and systems are made). registered). Surprisingly, another sequential increase is expected in the fourth quarter, with management forecasting revenue of $20 billion.
But this is where things get interesting and debate comes in (as Anders, Billy and I wrote a few months ago): CEO Jensen Huang and the management team have made it clear that they expect their data center sales (80% of total revenue last quarter) to continue to increase over the course of calendar year 2024, as an increased supply of its AI chips hits the market to meet insatiable demand. The market seems to have realized this, with the consensus of Wall Street analysts estimating next year’s revenue at almost $91 billion, implying an increase of more than 50%.
But semiconductor sales tend to be cyclical. Periods of rising income are often followed by a decline. All eyes are now on what happens in 2025. But for the record, during the latest earnings conference call, Huang said he “absolutely believes that data centers can grow through 2025” .
Of course, the jury is still out on this. At some point, I expect the world to take a break from building new IT infrastructure for AI. Maybe it will finally happen in 2025, or maybe it will delay until 2026 or later.
But if Huang is right and the roughly $1 trillion global AI data center opportunity continues to grow unabated over the next couple of years, Nvidia looks like a semiconductor stock reasonably valued. The shares are trading at a price 25 times higher than expected earnings per share for next year (calendar year 2024). I have no plans yet to sell any of my positions at Nvidia as another busy year lies ahead.
It’s time to dive into the AI ocean of Big Blue
Anders Bylund (IBM): The IBM you see today is very different from the IT one-stop shop of the turn of the millennium. As part of a prescient but painful strategy shift that began in 2012 and never really ended, Big Blue refocused its massive assets on the high-growth “strategic imperatives” of cloud computing, data security, analytics and AI.
The watsonx.ai platform is a developer platform tailor-made for enterprise-scale businesses looking for machine learning and generative AI tools. It includes support for generative AI in the app writing experience and the ability to build apps in a drag-and-drop GUI rather than hand coding, and builds on the many decades IBM’s AI research team.
And the company is not resting on its digital laurels. The company has cash equivalents of $11 billion and generated $10.3 billion in free cash flow over the last four quarters. And these funds are currently going directly to AI opportunities.
For example, IBM recently committed to training 2 million AI experts over the next three years, in collaboration with universities around the world. It also launched a $500 million investment fund focused on innovative AI start-ups.
As a result, IBM is poised to offset its strategy-shifting woes with robust gains in the years to come. Trading at just 2.4 times sales and 12.3 times free cash flow, IBM stock seems like an obvious buy today.
Yet market makers seem to have forgotten the giant shadow that IBM casts over AI opportunities. The stock has only gained 16% in 2023, lagging behind the S&P500 25% increase in the index.
I have no intention of throwing market-beating companies like Nvidia under the bus, and I own that stock myself. However, the chip designer’s stock changes hands at 27 times sales or 70 times free cash flow. If you’re looking for a solid AI investment through 2024, IBM combines fantastic growth prospects and an unbeatable AI track record with great stock prices.
This essential AI stock is lagging its peers this year but could soar in 2024
Billy Duberstein (ASML Holdings): Many AI-related stocks are up a lot this year, so there aren’t many good deals left. However, ASML Holdings, at least in comparison, underperformed many AI stocks, rising “only” 38% despite its machines being critical to the AI chip manufacturing process. Additionally, the stock remains about 15% below its late 2021 all-time high, while many other semiconductor and AI stocks are now above those prior highs.
There are several reasons for this year’s underperformance. First, ASML is a European stock, so the relative performance of each market may have some effect. Second, ASML was trading at a relatively higher valuation than other semiconductor equipment companies at the start of the year. So there wasn’t much ground to “make up” after the sector crashed in 2022. Even today, ASML trades at 35 times earnings.
Additionally, ASML management has already stated that the company won’t see much growth in 2024. This may be surprising, since most other semiconductor companies had a weak 2023 and are now forecasting a recovery in 2024. However, ASML’s growth has been a little different. . During the pandemic, ASML’s extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography machines were in such high demand and so complicated and expensive to build that the production bottleneck extended into this year . So while many other semiconductor equipment companies have seen revenue declines in 2023, ASML will actually see revenue growth of around 30% in 2023. It’s not until next year, in 2024, that it will suffer the effect of the post-pandemic economic slowdown.
However, as chip stocks tend to run ahead about a year, ASML could outperform some of its peers by 2025. That’s a year that management predicts will be a year of strong growth, as several new cutting-edge fabs are posted online using ASML’s latest EUV. Machinery. In fact, ASML just shipped the first parts of its first high numerical aperture (NA) EUV machine, the newest and most advanced EUV model, to Intel. The high NA machine is absolutely massive and will need to be shipped in 250 separate crates! Even though the first batch is shipping now, production with them probably won’t happen until late 2025.
While ASML stock isn’t cheap, it has a monopoly on the EUV technology needed to make sub-7nm chips, which the industry just surpassed a few years ago. Last year’s cutting-edge chips, such as the Nvidia H100, were manufactured on the 5nm node, and 2023 saw the production of the first 3nm chips.
But the first 2nm chips will be made in 2025, which is the node where Samsung and Intel hope to catch up with the foundry leader. Semiconductor manufacturing in Taiwan in cutting-edge logic chips. This intense competition for the 2nm node means that all of these companies will be purchasing many ASML machines to make these dreams a reality.
And the story doesn’t end there, as all major dynamic random access memory (DRAM) manufacturers will also start using EUV to make DRAM chips in the future. While Samsung started using EUV two years ago, 2025 will also see Micron begin using EUV for the first time in its memory production as the latest holdout to use the complex process.
Generative AI will rely heavily on cutting-edge processors and high-bandwidth memory, so expect ASML to possibly outperform its peers in 2024 after lagging in 2023.
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Anders Bylund holds positions at Intel, International Business Machines, Micron Technology and Nvidia. Billy Duberstein holds positions in ASML, Micron Technology and Taiwan Semiconductor Manufacturing. Nicolas Rossolillo holds positions in ASML, Micron Technology and Nvidia. The Motley Fool holds positions and recommends ASML, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and International Business Machines and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
3 Great AI Stocks to Own in 2024 was originally published by The Motley Fool