In this article, we will take a detailed look at 10 AI Stocks to Watch for the Rest of 2024.
Talking about the latest market situation during a program on CNBC, Julian Emanuel, Evercore ISI senior managing director, said that despite the ups and downs that have happened since the pandemic, the US remains an economy that is “envy of the world.” The analyst urged investors to pile into stocks that have historically performed well after the Fed started cutting rates and hinted at the expected “turbulence” related to US elections.
“We love what we call the Fed rate cut playbook. You go back to 1970, you look at all the rate cutting cycles, there’s a very pronounced outperformance in the year after the Fed starts cutting from info tech, surprise surprise. Small caps, which might be a bit counterintuitive considering how much they took it on the chin today, but also, barbelled by the more defensive sectors, consumer staples and health care. So, to us, that’s sort of the sensible way that will help you ride out if you get some turbulence, which, obvious, if there’s a contested outcome, you’re likely going to get some turbulence.”
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Pointing to market volatility, Emanuel said that the “wall of worry” is still strong.
“The wall of worry is still very, very intact. And if you think about it, yeah, the VIX is low compared to maybe longer run history, but actually, if you think about the inertia of the markets the last several weeks, the VIX is high, and it should be, in front of probably one of the biggest unknowns we’ve been facing, certainly in the last four years, if not longer.”
For this article we picked 10 AI stocks trending based on latest news. With each company we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Arm Holdings PLC – ADR (NASDAQ:ARM)
Number of Hedge Fund Investors: 38
Nick Frasse, Associate Product Manager at VanEck, recently said while talking to CNBC in a program that Arm Holdings PLC – ADR (NASDAQ:ARM) made a “splash” when it went public but then “flew under the radar.”
The analyst said he finds Arm Holdings PLC – ADR (NASDAQ:ARM)’s business model really interesting.
“Arm Holdings PLC – ADR (NASDAQ:ARM) is the architecture provider for many different companies, including Apple, Qualcomm, and Samsung. Businesses like this is where we see the most opportunity.”
William Blair analyst Sebastian Naji recently started covering Arm Holdings PLC – ADR (NASDAQ:ARM) with an Outperform rating.
The analyst said the chipmaker is seen as a “critical vendor” of computing intellectual property with “best-in-class” financials. He said Arm Holdings PLC – ADR (NASDAQ:ARM) generates revenue from over 29B chips sold in the mobile, automotive, IoT, and data center markets.
“Arm’s royalty/licensing revenue model drives best-in-class profitability— R&D is the largest expense, 35% of total revenue in fiscal 2024. With expanding royalty rates helping drive better operating leverage (long-term target of 60% non-GAAP operating margin), we see room for sustained EPS and free cash flow growth,” the analyst said.
Arm Holdings PLC – ADR (NASDAQ:ARM) has unveiled its latest processor design, v9, which features significant upgrades like enhanced encryption and vector processing. These improvements have allowed Arm Holdings PLC – ADR (NASDAQ:ARM) to double its take-rate compared to the previous v8 design, which is expected to boost royalty revenue over the next few years, according to analyst Naji.
Arm Holdings PLC – ADR (NASDAQ:ARM), led by Rene Haas, is also seeing growth from its mobile CSS and data center Neoverse subsystems, driving new licensing activity. Arm Holdings PLC – ADR (NASDAQ:ARM) is gaining traction in the data center market, traditionally dominated by Intel. With hyperscalers like Amazon, Google, Microsoft, and Meta developing their own chips and Nvidia leading the AI accelerator space, Arm Holdings PLC – ADR (NASDAQ:ARM) is positioned to benefit from this growing sector. Naji estimates ARM’s data center business could account for 15% of its royalty revenue by 2025.
9. Cloudflare Inc (NYSE:NET)
Number of Hedge Fund Investors: 39
Oppenheimer warns that the growing demand for data centers is expected to surpass infrastructure capacity, potentially leading to shortages in 2025. The surge in large language models and AI applications, which need vast computing power, is driving this demand.
“The hyperscalers are still locked in an LLM war where there is a shortage of infrastructure for training, which is helping with datacenter pricing,” said Oppenheimer analyst Timothy Horan in a note.
“Checks indicate extremely strong hyperscaler datacenter demand, and we will likely run out of capacity next year,” he added. “Positively, enterprises realize data is the new oil and will require migration to the cloud to enable AI. Everyone is trying to balance latency, cost, and accuracy, which often need smaller models.”
Oppenheimer named Cloudflare Inc (NYSE:NET) among the second derivative plays in the data center race poised to benefit.
How can Cloudflare Inc (NYSE:NET) benefit from AI? Being a key internet and Cloud infrastructure company, Cloudflare is positioned to benefit from the huge spending in AI. For example, Apple is launching a Private Cloud Compute (PCC) infrastructure to integrate AI features into its devices. Apple’s PCC will use its own silicon and employ RSA Blind Signatures for secure connections, relying on third-party providers like Cloudflare Inc (NYSE:NET) for encrypted communication. Morgan Stanley analysts estimate Cloudflare could generate up to $100 million annually from handling Apple’s AI queries.
Last month the company posted strong quarterly results and outlook, prompting Guggenheim to raise its price target.
Analyst John DiFucci of Guggenheim noted that Cloudflare Inc (NYSE:NET) business showed signs of a turnaround after more than a year of slowing momentum. Cloudflare Inc (NYSE:NET) reported an 11% increase in adjusted new annual recurring revenue, following declines in the previous two quarters. DiFucci attributed the improvement to changes in Cloudflare Inc (NYSE:NET)’s go-to-market strategy and growth in its enterprise deals, particularly those involving Cloudflare Workers.
“We’ve always respected Cloudflare Inc (NYSE:NET) vision and product lineup but questioned if its product-led approach was right as it targeted larger markets,” DiFucci wrote. He added that while this quarter’s results are positive, it’s too early to call it a lasting trend.
However, DiFucci maintained a Sell rating on the stock but raised the price target from $50 to $57.
Baron Fifth Avenue Growth Fund stated the following regarding Cloudflare, Inc. (NYSE:NET) in its Q2 2024 investor letter:
“Cloudflare, Inc. (NYSE:NET) provides content delivery network services, cloud cybersecurity, denial-of-service mitigation, Domain Name Service, and ICANN-accredited domain registration services. Shares fell 14.4% during the quarter on remarks from the CEO about worsening macro conditions, citing the negative impact of geopolitical uncertainties on customer buying behavior. On the positive side, the company posted strong quarterly results with revenue growth of 30% year-over-year, showing evidence that the changes to the company’s go-to-market strategy were resonating with solid growth across its large customer cohorts (revenues from customers spending over $100,000 represented 67% of the total, up from 62% in the first quarter of 2023), double-digit improvement in sales productivity, and new pipeline attainment ahead of plan. Cloudflare reiterated revenue guidance for the year on resilience in cybersecurity spend. While we fine-tuned our model on the back of the company’s increased macro headwind commentary, pushing out revenue reacceleration estimates from the second quarter of 2024 to the first quarter of 2025, this is still ahead of guidance. We retain conviction in the long-term thesis: a strong founder-led business with a unique global network and significant pricing advantages powering a disruptive multi-product growth story with improving margins. We therefore remain shareholders.”
8. Palantir Tech Inc (NASDAQ:PLTR)
Number of Hedge Fund Investors: 44
While talking about Mizuho’s latest rating action on Palantir Tech Inc (NASDAQ:PLTR), Jim Cramer said the following in a latest program:
“In their brief mention of Palantir, they say, “We remain concerned by the lack of visibility in its business and find the current valuation indefensible,” and they raise the price target from 30 to 24. You have someone who doesn’t like the stock, and it won’t stop. They have software, and they have Alex Karp, who is one of those CEOs that we dream of, right?”
Mizuho maintained a Sell rating on Palantir Tech Inc (NASDAQ:PLTR) in a latest note but increased its price target to $30.
What makes Palantir Technologies Inc (NYSE:PLTR) one of the top AI stocks? Its technologies are actually solving the problems of businesses. Palantir’s data technology Ontology is solving the famous hallucination problem for AI systems, thanks to the company’s years of experience with military and defense systems. Earlier this year at an event with customers, Palantir Technologies Inc (NYSE:PLTR) shared some specifics on how its customers are being able to reduce costs and increase profits due to its artificial intelligence platform (AIP) that was launched about a year ago.
Airbus accelerated A350 production by 33%, BP reduced costs per barrel by 60%, and Jacobs Connect cut power usage by 30%. Panasonic decreased waste by 12%, ESI Group sped up ERP harmonization by 70%, and PG&E reduced transformer ignitions by 65%. Eaton boosted productivity by 25%, while Tyson Foods achieved $200 million in cost savings.
However, Palantir Technologies Inc (NYSE:PLTR) stock’s valuation has been a concern for many.
The stock is trading at about 21.2 times the next 12 months (NTM) revenue. For fiscal year 2024, Palantir expects revenue growth of 24% year-over-year (YoY) to $2.746 billion, with an adjusted operating income of $970 million, representing a 35.3% margin. However, revenue growth is expected to slow over the next two years, with estimates suggesting a 22% YoY growth rate, potentially bringing revenues to around $4 billion by fiscal 2026. If Palantir Technologies Inc (NYSE:PLTR) can improve margins by 100 basis points annually, it would be able to generate about $1.5 billion in adjusted operating income by FY26, with a present value of $1.3 billion when discounted at 8%. Applying an S&P 500-like growth multiple of 2.5 to 2.75 times earnings, Palantir Technologies Inc (NYSE:PLTR) would have a P/E of 46, translating to a price target of $27.
Carillon Scout Mid Cap Fund stated the following regarding Palantir Technologies Inc. (NYSE:PLTR) in its first quarter 2024 investor letter:
“The top contributor to return for the quarter was Palantir Technologies Inc. (NYSE:PLTR). Sentiment improved on Palantir after it reported stronger than expected commercial customer revenue and free cash flow. U.S. commercial growth was especially encouraging, as U.S. commercial revenue was up by a large percentage year over year for the fourth quarter and U.S. commercial customer count grew nearly as much. We expect Palantir to become one of the premier artificial intelligence (AI) software providers, built on its Foundry and AIP platforms.”