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.”
7. Intel Corp (NASDAQ:INTC)
Number of Hedge Fund Investors: 75
Goldman Sachs has cut its earnings estimates for the semiconductor giant, pointing to “muted” demand for PCs.
“…[W]e reduce our 2025/26 non-GAAP EPS (excl. SBC) estimates by 7% as we reflect a slower recovery in the PC CPU and FPGA businesses, partially offset by a more constructive outlook for server CPUs,” analyst Toshiya Hari wrote in a client note. “While we believe management is taking steps to right-size the organization, we remain cautious on the stock as we have yet to see signs of a return to process technology leadership. In fact, Intel may continue to outsource a significant portion of its client CPU tiles to TSMC beyond 2025, according to our checks, and the company still lacks a major presence in the profitable data center accelerator market.”
Hari kept his Sell rating and a $21 price target on Intel Corp (NASDAQ:INTC).
Intel faces challenges as it navigates a major restructuring plan, which includes cutting around $10 billion in operating expenses and reducing its workforce by 15,000 this year. Inte is only expected to achieve free cash flow positivity by 2025, and for 2024, it anticipates modestly negative adjusted free cash flow due to restructuring costs and reduced capital spending.
Intel’s plan involves lowering operating expenses to about $17.5 billion while keeping net capital expenditures between $12 billion and $14 billion in 2025. However, with $25 billion in net debt and ongoing restructuring, the path to recovery and rebound for Intel is long.
ClearBridge Large Cap Value Strategy stated the following regarding Intel Corporation (NASDAQ:INTC) in its Q3 2024 investor letter:
“While the market environment clearly was a headwind in the third quarter, several of our large positions also faced challenging conditions, which negatively impacted results. In the information technology (IT) sector, Intel Corporation (NASDAQ:INTC) has come under additional pressure due to continued softness in the company’s core PC and server markets as well as concerns on the company’s longer-term competitive position. While Intel’s turnaround is not happening overnight, we are constructive on the outlook into 2025: the company’s product positioning should be much improved and it should be positioned to gain market share in a cyclical upswing in which it has strong earnings power. A somewhat adverse spending environment due to AI myopia has weighed on shares, but we still think the market is undershipping PCs and general servers following a COVID normalization period that saw demand get pulled ahead and then languish as companies froze IT budgets. The installed base is now getting older, and we expect a strong refresh cycle into next year. The delay is actually beneficial to Intel, whose product positioning will be all the more improved. While our investment case is not predicated on an M&A transaction, and we believe one is unlikely, the expression of interest in the company speaks to the value of the assets, which we think still trade at a meaningful discount to fair value.”
6. Adobe Inc (NASDAQ:ADBE)
Number of Hedge Fund Investors: 107
Bill Stone, The Glenview Trust Company CIO, said while talking to CNBC in a latest program that people were not happy with Adobe Inc (NASDAQ:ADBE) when the company last gave guidance but he is bullish on the stock for several reasons.
“We don’t think they are behind there. We think some real attractive growth there and some really attractive profitability While it doesn’t look cheap on the surface, with their growth profile and relative to where it normally trades, I do think it’s an interesting one to look at. And with the stock market pushing on all-time highs here all the time lately, looking for something out of the, you know, realm seems a little more interesting.”
Adobe Inc (NASDAQ:ADBE) expects fourth-quarter revenue between $5.5 billion and $5.55 billion, with a midpoint of $5.525 billion, falling short of the $5.6 billion consensus estimate. Adobe Inc (NASDAQ:ADBE) also forecasts earnings per share (EPS) ranging from $4.63 to $4.68, with the midpoint slightly below the $4.67 estimate.
Adobe Inc (NASDAQ:ADBE) has become a complex case for analysts who are still gauging whether Adobe would be a net beneficiary of the AI boom or a loser. On the one hand, Adobe Inc (NASDAQ:ADBE) is under threat with tons of AI tools good enough to make beginner-level designs, posts and videos for individuals or companies with low or no marketing budget. But on the other hand, the company is launching several AI-powered tools and integrating generative AI tools in its products that could boost its revenue in the future.
Daniel Newman, CEO of Futurum Group, said in a program on CNBC that the latest earnings show the effects of a macro slowdown but Adobe Inc (NASDAQ:ADBE) could benefit if companies decide to use the company’s AI tools to cut its reliance on human workers.
Polen Global Growth Strategy stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter:
“With Adobe Inc. (NASDAQ:ADBE), in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
5. Advanced Micro Devices Inc. (NASDAQ:AMD)
Number of Hedge Fund Investors: 108
Oppenheimer expects strong Q3 results from Advanced Micro Devices Inc. (NASDAQ:AMD) but remains cautious on the stock amid soft PC market and rising competition from Nvidia and Intel.
The firm projects data center revenue to rise by 21% quarter over quarter in Q3 and 114% year over year, according to its model.
“Management has impressively grown AMD’s AI franchise from nil to ~$4B over just the past year,” said Oppenheimer analysts, led by Rick Schafer. “Unfortunately, investor expectations have consistently remained out of reach. Initial expectations for ~$8B MI300 sales earlier this year are now closer to $5B, based on our discussions.”
Oppenheimer holds a Perform rating on Advanced Micro Devices Inc. (NASDAQ:AMD). “We remain cautious about AMD’s ability to deliver a profitable long-term business model as the second horse in the secularly declining PC market,” Schafer added. “We see financially and technologically stronger Nvidia (NVDA) and market leader Intel (INTC) solidifying their positions in both CPU and GPU, challenging AMD’s revenue and gross margin trajectory.”
Advanced Micro Devices, Inc. (NASDAQ:AMD) shares recently fell after its latest event.
One of the reasons why the stock fell was that the company did not update its $4.5 billion AI revenue forecast or its outlook through 2025, leaving investors disappointed. Analysts are now looking to Advanced Micro Devices, Inc. (NASDAQ:AMD)’s Q3 earnings release, where they expect clearer guidance and more confidence in the company’s projections.
At the event, Advanced Micro Devices, Inc. (NASDAQ:AMD) showcased several new products, including the Turin EPYC data center CPUs and the Instinct MI325x AI accelerator. The company also introduced the Ryzen AI PRO 300 Series, the first enterprise laptops integrated with Microsoft’s Copilot.
Additionally, Advanced Micro Devices, Inc. (NASDAQ:AMD) reaffirmed its two-year AI chip development roadmap, with the MI325x slated for 2024, the MI350 expected in late 2025, and the MI400 set for 2026. Dr. Su highlighted that the data center AI accelerator market is forecasted to grow from $45 billion in 2023 to $500 billion by 2028.
While Advanced Micro Devices, Inc. (NASDAQ:AMD) increased its total addressable market projection through 2028, investors are eager to see what this means for the company’s near-term performance. Advanced Micro Devices, Inc. (NASDAQ:AMD) claimed the MI325x outperforms Nvidia’s H200 HGX in several areas. However, with Nvidia’s upcoming Blackwell GPUs on the horizon, it remains to be seen how AMD’s products will stack up. Both companies plan to offer annual performance and memory upgrades for generative AI, with Nvidia also shortening its product release cycle.
However, Citi analysts reaffirmed their Buy rating and $210 price target for AMD following the event, noting Advanced Micro Devices, Inc. (NASDAQ:AMD)’s expanded total addressable market. However, they cautioned that margins could take a hit in the short term due to the MI300. Still, they highlighted AMD’s advantages over Nvidia, such as increased memory, lower prices, and an open ecosystem.
Jefferies analyst Blayne Curtis also maintained his Buy rating, though he pointed out the event focused more on product launches than providing detailed roadmaps. The key question remains how much of the $500 billion opportunity Advanced Micro Devices, Inc. (NASDAQ:AMD) will capture.
Oppenheimer analysts were less enthusiastic, describing the event as “largely uneventful” and said Advanced Micro Devices, Inc. (NASDAQ:AMD)’s management reiterated familiar CPU and GPU roadmaps. While AMD has generated $4 billion in AI revenue over the last year through its MI Instinct products, the firm’s performance continues to fall short of expectations, leading them to retain their Perform rating.
Columbia Threadneedle Global Technology Growth Strategy stated the following regarding Advanced Micro Devices, Inc. (NASDAQ:AMD) in its Q2 2024 investor letter:
“Shares of Advanced Micro Devices, Inc. (NASDAQ:AMD) lagged the market after the company reported earnings results that, while generally strong, left the market wanting more. The company reported AI revenue of ~$600 million and increased its forward-looking outlook for AI revenue growth, but shares took a breather, as results missed elevated expectations after the stock’s strong performance. Despite the stock’s underperformance during the quarter, the company’s AI story remains very much intact. The growth outlook for the company is supported by better cloud demand, enterprise recovery and continued share gains ahead of the company’s new AI product launch.”
4. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Jim Cramer in a latest program on CNBC said he is “concerned” about Alphabet Inc (NASDAQ:GOOG)’s ability to keep posting strong earnings because of some core issues. Cramer said his charitable trust owns “some” Alphabet Inc (NASDAQ:GOOG) shares.
“The government has made it much harder to own it with this antitrust lawsuit. I’m also concerned about Alphabet’s ability to keep putting up strong earnings. It has become more of a media business and is in a very competitive space.”
Despite constant alarms going off about its search business, Alphabet Inc Class C (NASDAQ:GOOG) search revenue jumped about 13.7% in the second quarter year over year. As of the end of June, Google has about 91.06% share of the search engine market, just 1.65% lower than the December 2019 levels. With AI overviews and other search initiatives, Alphabet Inc Class C (NASDAQ:GOOG) will be able to stave off any competitors given its dominance in the market. According to StatCounter report, Bing search engine’s market share only increased from 3.03% in August 2023 to 3.91% in August 2024. This shows MSFT has not been able to make any notable dent in Google’s market share.
Cloud and YouTube are two key strong catalysts for Alphabet Inc Class C (NASDAQ:GOOG) shares. During the second quarter, Alphabet’s Cloud revenue rose 28.8% to $10.35 billion, crushing past analysts’ forecasts of $10.16 billion. Alphabet Inc Class C (NASDAQ:GOOG) is on the path to reach a $100 billion revenue run-rate from YouTube Ads and Google Cloud by the end of 2024.
Oakmark Select Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) was the top detractor during the quarter. The U.S.-based communication services company’s stock price fell after a U.S. District Court ruled that Google violated Section 2 of the Sherman Act by maintaining a monopoly in general search engine services via exclusive distribution agreements. We think this case is unlikely to hurt Alphabet’s valuation over the long term as regulations previously en[1]acted in the European Union to address similar issues did not materially erode the company’s market share. We continue to believe that Alphabet is an attractive investment.”
3. Nvidia Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
Talking to Bloomberg in a latest program, billionaire Stanley Druckenmiller expressed regret over selling Nvidia Corp (NASDAQ:NVDA).
“I’ve made so many mistakes in my investment career. One of them was I sold all my Nvidia,” the billionaire said, confirming that he owns no Nvidia Corp (NASDAQ:NVDA) shares as of today.”
“It was a big mistake in terms of I am, by the way, when I saw you at that conference, which was 18 months ago, I fully expected to own it for years, but I think it was 300 and change. And as I also said in another media interview, I’m not Warren Buffett. So I thought I was going in. But what changed is it tripled in a year, and I thought the valuation was rich. We are big term long-term believers in AI, and there are so many ways we’re playing AI, particularly the infrastructure that’s been built out to support the power needed. And yes, I think NVIDIA is a wonderful company, and where the price to come down, we get involved again. But right now I’m licking my wounds from a bad sale there.”
Nvidia’s declines after the Q2 results were more or less expected amid Blackwell delay reports confirmed by management. However, the delays were mainly due to a change in Blackwell GPU mask. That does not affect the main functional logic or design of the chip, according to analysts. While Blackwell has been delayed for a few months, it does not change the core growth thesis for Nvidia.
Nvidia is set to see huge growth on the back of the data center boom amid the AI wave.
At Nvidia’s GPU Technology Conference in March 2024, CEO Jensen Huang estimated annual spending on data center infrastructure at about $250 billion. Over the next decade, this could total between $1 trillion and $2 trillion, depending on how long this level of investment continues. During the same Q&A session, Bank of America’s Vivek Arya echoed this estimate, suggesting the total addressable market would fall in the $1-2 trillion range, particularly as countries invest in their own AI infrastructure. By the end of the decade, spending could be at the high end of that range.
Vltava Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“Over the summer, we devoted a lot of time to studying the AI-related investment wave. This spans a wide range of sectors and our view could be very briefly summarised as follows: The first-tier beneficiaries are primarily companies in the semiconductor sector, NVIDIA Corporation (NASDAQ:NVDA) perhaps the most. That company is benefiting from the huge increase in investment by large technology companies to build enormous data centres. We know who NVIDIA’s customers are. They are companies like Meta, Alphabet, Amazon, and Microsoft. They are investing hundreds of billions of dollars into their AI capabilities. What is not entirely clear, however, is who are and will be the customers of NVIDIA’s customers, and, more importantly, when, and if, they will be able to come up with such huge demand for AI services that the profits from AI will justify and pay for the enormous investments all these companies have been making. The further we move away from the starting point that NVIDIA represents in our more broadly-reaching estimates, the lessreliable those estimates are.So far, we know just one thing for sure, and that is that investments in AI capabilities are ongoing and they are huge. They are not only bringing large demand to chipmakers and the semiconductor sector but to some other sectors as well. Indeed, building AI clusters also requires the construction of new semiconductor factories, new energy sources, and all the associated infrastructure. The numbers under consideration are incredibly high. It is possible that over the next decade the construction of AI centres will necessitate a 20% increase in US energy consumption. The investment required will be measured not in the hundreds of billions of dollars, but in an order of magnitude higher. Maybe two orders of magnitude.”
2. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Talking about the latest report by Counterpoint pointing to strong Apple Inc (NASDAQ:AAPL) iPhone 16 sales in China, Jim Cramer said on CNBC:
“According to an outfit called Counterpoint, which is a Bloomberg — provided to Bloomberg, sales are up 25%. This is completely counter to every single report we got. This sounds much more authoritative. I believe it. I think the stock is going to blow through a lot of levels here. I don’t understand why people didn’t get that what happens in China is that the stimulus is impacting some areas, not others.”
Almost every bullish case on Apple Inc (NASDAQ:AAPL) was built around this assumption: millions of people would rush to upgrade their iPhone because of AI features. But the latest numbers for iPhone 16 do not show much enthusiasm for the new device.
Apple Inc (NASDAQ:AAPL) has been seeing a long-term decline in mobile carrier upgrade rates, especially postpaid, for several years. This suggests that people are holding onto their devices longer, likely due to economic factors, satisfaction with current technology, or a lack of exciting new features in recent models. This trend isn’t great for Apple Inc (NASDAQ:AAPL). Can Apple Intelligence break this trend? We’ll find out soon.
However, the assumption that we will see a huge upgrade cycle of iPhone just because of AI is big and comes with a lot of risks. Apple Inc (NASDAQ:AAPL) trades at a forward PE multiple of around 35x, well above its 5-year average of nearly 27x. Its expected EPS forward long-term growth rate of 10.39% does not justify its valuation, especially with the iPhone upgrade cycle assumption. Adjusting for this growth results in a forward PEG ratio of 3.33, significantly higher than its 5-year average of 2.38.
Vltava Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
“You probably have not missed the news that Warren Buffett has already sold half the stock from his largest public markets investment, Apple Inc. (NASDAQ:AAPL). It was a phenomenal investment for Berkshire. Over the course of seven years or so, it brought a profit of well over USD 100 billion. Apple comprised a very large position within Berkshire’s public portfolio, and this was the reason we avoided Apple stock outright during that time. We considered our exposure to Apple through our holdings of Berkshire stock to be sufficient, and we ended up making a lot of money on it. There has been a great deal of speculation in the market about what Buffett’s sale of Apple signals regarding his view of the stock market. I think the reason for the sale is much simpler. Buffett probably considers Apple stock so expensive that he prefers to cash in at 20% less (after all, Berkshire must pay tax on its profits). He started selling in the first quarter of the year. When I was in Omaha for the general meeting in May, Buffett said he was still selling, and I expect he continued to do so in the third quarter. I have to say that, as a Berkshire shareholder, I am happy about the Apple sale. I think Berkshire’s management will find a better use for this money, as they always have in the past. It is quite likely that they already have a very specific idea about this. If that takes two or three years, it does not matter at all. This is not a race and, in the meantime, the risk of holding Berkshire Hathaway stock itself has been greatly reduced.”
1. Amazon.com (NASDAQ:AMZN)
Number of Hedge Fund Investors: 308
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 recent 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.”
The firm named Amazon.com (NASDAQ:AMZN) among the obvious winners of the data center race, along with several other primary and secondary players.
AWS’s revenue growth accelerated from 17.2% in Q1 to 18.8% in Q2, driven by a shift from on-premises infrastructure to cloud solutions and increasing demand for AI capabilities. Amazon.com Inc (NASDAQ:AMZN) advertising segment added over $2 billion in revenue year-over-year, indicating significant potential in video advertising and opportunities within Prime Video offerings.
Like other tech companies, fears stemming from high CapEX are keeping investors on the sidelines. Amazon.com Inc (NASDAQ:AMZN) spending is expected to rise amid broadband project Project Kuiper and AI growth. Investors are still figuring out whether AI monetization and ROI will come anytime soon. Amazon.com Inc (NASDAQ:AMZN) is also facing a slowdown in consumer spending, especially for higher-ticket items like electronics and computers.
Based on Amazon.com Inc (NASDAQ:AMZN) Q3 guidance, its revenue growth would be 11%. The stock is trading 35x its fiscal 2025 earnings estimates set by Wall Street. This shows the stock is fairly priced and investors looking for strong growth could look elsewhere.
Alphyn Capital Management stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“Amazon.com, Inc.’s (NASDAQ:AMZN) continued growth is driven by its strong performance in AWS and advertising, which grew 19% and 20%, respectively. E-commerce growth moderated to 9.3%, likely due to softer consumer demand.
In previous letters, I mentioned how Amazon’s heavy investments in logistics and fulfillment suppressed margins for some time, but the company is now reaping the rewards of those earlier expenditures. European operations have been profitable for the second consecutive quarter, while North American operating margins have risen from pandemic lows to 5.3%. A key ongoing area of focus for Amazon has been reducing the “cost to serve”; this is beginning to show tangible benefits. In 2023, Amazon undertook a “regionalization” strategy, which divided the U.S. into eight distinct regions for fulfillment and transportation, with corresponding distribution centers in each. As I learned from an expert interview done by InPractise, “regionalization” has resulted in estimated shipping expenses dropping from $4.76 per unit to $4.50, and they are now approximately $4.26, with potential reductions of 2-3% annually. Interestingly, Amazon leaned on its third-party vendors (3P) to finance much of this strategy. It did so by requiring 3P vendors ship inventory to the multiple regional distribution centers, instead of to a single location as they used to do. Moreover, Amazon imposed penalties for failing to meet strict minimum and maximum quantities. In this way, Amazon used 3P inventory to expand its distribution capacity by around 24 million square feet, much of which it could use for its own 1P inventory. Clever strategy, but one wonders if this raises the risk of an eventual vendor backlash due to the added financial and logistical pressures on 3P sellers.
Like Alphabet, Amazon is investing heavily in its AWS infrastructure to support its growing AI business. In the first half of the year, the company spent $30.5 billion on capital expenditures, with plans to exceed that in the year’s second half. When questioned about this during the earnings call, CEO Andy Jassy emphasized that they are seeing significant demand for AI-related services, which he believes will become a “very large” business for Amazon.”
While we acknowledge the potential of Amazon.com Inc (NASDAQ:AMZN), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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