In this article, we will take a detailed look at the 10 AI Stocks to Watch on Latest News and Analyst Ratings.
AI discussion boards online are buzzing with a new development where tech experts are pointing to a possible plateauing of performance in artificial intelligence applications.
CNBC’s Deirdre Bosa in a latest program quoted tech investor Ben Horowitz, who said in a recent podcast that he’s not seeing performance improvement despite increasing GPUs.
“We’re increasing GPUs at the same rate, but we’re not getting the intelligence improvements at all out of it.”
OpenAI is reportedly facing similar problems with its upcoming AI model.
“The Information reports that the quality increase in OpenAI’s upcoming advanced model, Orion, is smaller than the jump seen between the last two flagship models, GPT-3 and GPT-4. In other words, generational advancements may have peaked as the models are essentially running out of data to train on,” Bosa said.
While the next jump in AI performance is far away in the future, the possibilities this technology has unlocked based on the existing data and resources are keeping investors and Wall Street analysts busy.
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In this article we take a look at top AI stocks trending on the back of latest news and analyst ratings. With each stock 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).
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10. Bentley Systems Inc (NASDAQ:BSY)
Number of Hedge Fund Investors: 25
KeyBanc’s capital markets research team sees potential upside for software stocks following Donald Trump’s victory in the U.S. presidential election.
“With Donald Trump as president, we see a likely backdrop of lower corporate taxes, which would be broadly positive for high-tax-paying companies within our coverage,” KeyBanc stated.
The firm published a list of stocks it’s watching following Trump’s victory. BSY is part of this list.
Bentley Systems Inc (NASDAQ:BSY) makes software solutions for infrastructure projects, civil engineering, architecture, and construction. Bentley Systems Inc (NASDAQ:BSY) has strong secular growth catalysts. As companies look to cut costs, the demand for Bentley Systems Inc (NASDAQ:BSY)’s software systems is increasing. The global engineering software market was valued at $33 billion in 2022 and is projected to reach nearly $131 billion by 2030, reflecting a robust 18.8% CAGR.
Despite this, the stock’s valuation has been a concern for investors. It’s trading at a forward P/E of about 45 compared with the industry median of 23. The stock has a forward EV/Sales multiple of approximately 12.1x, with an estimated next twelve months (NTM) revenue growth rate of 11.2%. This contrasts with the median implied annual recurring revenue (ARR) growth rate of about 18% from the Meritech SaaS Index. As of June 21, 2024, the median forward EV/Revenue multiple for publicly held SaaS application software companies, according to the Meritech Capital Index, was around 5.4x. This means the stock is currently overvalued based on its growth projections.
Artisan Small Cap Fund stated the following regarding Bentley Systems, Incorporated (NASDAQ:BSY) in its Q2 2024 investor letter:
“We ended our investment campaigns in Bentley Systems, Incorporated (NASDAQ:BSY) and Etsy during the quarter. Bentley Systems is the leading provider of engineering software used to design roads, bridges, tunnels, rail systems and other public works. Construction is one of the economy’s least digitized verticals, and our thesis was based on the view that there are significant opportunities for software to increase productivity within civil engineering projects. We also viewed the company as well positioned to support the infrastructure spending encouraged by the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. After a successful multiyear investment campaign, we decided to exit the position due to the market cap outgrowing our small-cap mandate.”
9. Palantir Tech Inc (NYSE:PLTR)
Number of Hedge Fund Investors: 44
Jefferies recently downgraded Palantir Tech Inc (NYSE:PLTR) to “Underperform” from “Hold,” citing concerns over the stock’s overvaluation and indicating that it is waiting for a more favorable entry point.
The investment firm has set a target price of $28 for the stock.
Analysts, led by Brent Thill, acknowledged that they underestimated the surge in momentum Palantir Tech Inc (NYSE:PLTR) generated following the introduction of its Artificial Intelligence Platform (AIP) boot camps. They also failed to fully appreciate the company’s ability to deliver four consecutive quarters of accelerating growth, both in top-line revenue and remaining performance obligations (RPO), following a series of underwhelming results in the first three quarters of 2023.
While the analysts recognized the achievement of 30% year-over-year revenue growth (on a 17% comparison) and 59% year-over-year RPO growth (on a -21% comparison), they cautioned that Palantir Tech Inc (NYSE:PLTR) will face more challenging comparisons in the upcoming quarters. They believe it will be increasingly difficult for Palantir Tech Inc (NYSE:PLTR) to sustain or accelerate its growth as it moves into the latter part of 2024 and 2025.
Argus also downgraded Palantir to “Hold,” noting that while Palantir Tech Inc (NYSE:PLTR) posted strong results in the third quarter, with accelerating revenue and margin expansion, it may be facing a stock price that has outpaced its underlying fundamentals.
8. AppLovin Corp (NASDAQ:APP)
Number of Hedge Fund Investors: 54
AppLovin Corp (NASDAQ:APP) shares are trending after the company posted strong quarterly results and received praise from Wall Street.
Daiwa Securities raised its price target after the mobile technology company posted stronger-than-expected third-quarter results.
Analyst Jonathan Kess upgraded AppLovin Corp (NASDAQ:APP) to “outperform” from “neutral,” citing management’s effective execution since the introduction of Axon 2.0 in the first quarter of 2023. “Growth of 20-30% is achievable in the mobile gaming sector alone as AppLovin Corp (NASDAQ:APP)’s AI continues to improve, driving company and market expansion,” Kess noted, adding that recent tech upgrades from Q3 2024 have long-term growth potential. He pointed to fresh opportunities in e-commerce and connected TV, expected to contribute revenue in fiscal 2025, while Street estimates remain conservative, suggesting further upside. AppLovin Corp (NASDAQ:APP)’s position as a market leader stands out as its peers face distractions or a lack of focus on mobile gaming, alleviating prior concerns about growth peaking.
Kess raised his price target on AppLovin Corp (NASDAQ:APP) significantly to $280 from $80, highlighting the company’s expanding market, rising profitability, and increasing free cash flow despite the stock’s strong year-to-date performance.
Some believe despite the latest bull run the stock has more room to run. AppLovin Corp (NASDAQ:APP) primarily focuses on helping game developers attract and monetize users. Game developers promote their games as advertisers when they seek to acquire users. AppLovin Corp (NASDAQ:APP)’s AppDiscovery program supports these developers in running user acquisition (UA) campaigns. After securing app installs, developers turn to revenue generation. AppLovin Corp (NASDAQ:APP)’s MAX platform serves as a monetization tool for mobile apps, where developers can act as publishers by offering ad space for programmatic auctions, with advertisers bidding on these spots. AppLovin Corp (NASDAQ:APP) earns a percentage of the ad spending revenue that publishers receive through the MAX platform.
If AppLovin Corp (NASDAQ:APP) meets its fourth-quarter 2024 revenue forecast midpoint of $1.25 billion, this would reflect 31% year-over-year growth for the quarter. This forecast exceeded analysts’ expectations, who estimated $1.18 billion in fourth-quarter revenue. If AppLovin Corp (NASDAQ:APP) hits the midpoint of its Q4 adjusted EBITDA guidance at $750 million, adjusted EBITDA would grow 57.5% compared to the same period last year.
AppLovin Corp (NASDAQ:APP)’s one-year forward PEG (price-to-earnings-to-growth) ratio currently stands at 1.78, based on a forward P/E of 54.78 and an estimated EPS growth rate of 30.65%. Typically, growth stocks are seen as overvalued at a PEG ratio above 2.0. At a one-year forward PEG of 2.0, AppLovin Corp (NASDAQ:APP)’s stock price could reach $324.28—an 11.81% gain from its November 9 close.
ClearBridge Mid Cap Strategy stated the following regarding AppLovin Corporation (NASDAQ:APP) in its Q3 2024 investor letter:
“Stock selection in the IT sector was the greatest contributor to relative performance, driven by AppLovin Corporation (NASDAQ:APP), which operates a software-based platform for advertisers to enhance the marketing and monetization of their content, particularly in mobile apps. We believe the company is one of the best examples of an AI beneficiary in the mid cap market, as it has already incorporated AI capabilities into its platform, translating into more effective take rates on clients’ mobile games and transactions. We believe mobile games represent only the tip of the iceberg of AppLovin’s potential for its AI-enabled platform and that it has a strong growth trajectory over the next few years.”
7. Dell Tech Inc (NYSE:DELL)
Number of Hedge Fund Investors: 88
Dell Tech Inc (NYSE:DELL) shares recently rose after Morgan Stanley analyst Erik Woodring increased his price target on the stock citing server sales. Woodring now projects Dell Tech Inc (NYSE:DELL)’s AI server revenue will reach about $20 billion by fiscal 2026, a 56% increase over previous forecasts, which could bring earnings per share up to $10.50—roughly 12% above current Wall Street estimates.
Woodring attributes Dell Tech Inc (NYSE:DELL)’s momentum in the AI server market to steady demand from clients, growing market share, and substantial repeat orders from large Tier-2 cloud providers, including Tesla, xAI, and CoreWeave. In addition to corporate demand, Woodring highlighted rising interest from sovereign funds in the Middle East and U.S. government entities.
While some shipping details for fiscal 2026 and calendar 2025 remain uncertain, Woodring noted Dell Tech Inc (NYSE:DELL)’s solid positioning in the AI server market. Early 2025 is expected to bring the initial delivery of Nvidia’s Blackwell GPUs, which he sees as crucial to Dell Tech Inc (NYSE:DELL)’s sustained growth in AI servers.
The analyst increased his price target on Dell Tech Inc (NYSE:DELL) to $154 from $136.
Dell Tech Inc (NYSE:DELL) boasts a diverse revenue base, with around half generated in the U.S. and the rest from international markets. Of this, the Client Solutions Group (CSG) — responsible for PCs, monitors, and workstations — contributes 55%. However, CSG’s revenue has faced recent challenges, with a 5.5% decline in 2023 and another 12% year-over-year drop in Q2.
Dell Tech Inc (NYSE:DELL)’s Infrastructure Solutions Group (ISG) generates 38% of global revenue and is positioned to capitalize on AI advancements. ISG, already a leader in external RAID storage, could find fresh growth opportunities across data storage, AI servers, and cloud services, with its AI segment having an estimated 18% CAGR total addressable market until 2027, largely driven by AI services. Sales of Dell’s PowerEdge XE 9680 server, a key product, rose by 23% year-over-year in Q2.
With free cash flow projected to reach $7.67 billion by January 2025 and EPS estimated to grow from $7.13 to $9.38, the market may be slow to fully recognize these fundamental improvements despite a 75% year-to-date stock increase. Dell Tech Inc (NYSE:DELL) currently trades at a P/E non-GAAP trailing twelve months of 18x and a forward P/E of 16.6x, which are respectively 25% and 30% below the sector median. Its price-to-sales ratio of 1x also stands out against the sector’s 3x median, while its price-to-FCF at 12x remains well below the sector’s 21x, a 44% discount.
Carillon Scout Mid Cap Fund stated the following regarding Dell Technologies Inc. (NYSE:DELL) in its Q2 2024 investor letter:
“Dell Technologies Inc. (NYSE:DELL) was a top contributor despite reporting disappointing first-quarter earnings results, because investors looked through the near-term disappointment and expected strong growth from AI-related servers and personal computers. We expect Dell to participate in the growth of artificial intelligence hardware, especially as enterprises invest more aggressively. We like the company’s depth and breadth of products and services, as well as its focus on keeping costs low.”
6. Adobe Inc (NASDAQ:ADBE)
Number of Hedge Fund Investors: 107
Last month, UBS Global Wealth Management published a bullish report on US stocks and issued a list of its top picks. Adobe Inc (NASDAQ:ADBE) was part of the list. The firm said it now has an attractive view on U.S. equities, supported in part by growing adoption of artificial intelligence technology, and the investment bank has listed its top picks in the market.
The firm sees further gains ahead of the market, whose benchmark, the S&P 500 (SP500), has risen +22% this year, including 46 record-high closes. UBS previously had a neutral view on U.S. stocks, but favorable domestic and global factors, such as China’s recent stimulus measures, prompted UBS’s upgrade.
“From a macro perspective, the combination of slowing but durable economic growth, healthy earnings growth, and continued Fed rate cuts are all supportive,” David Lefkowitz, head of equities Americas at UBS GWM, said in its Equity Compass note. While economic growth is slowing, the country’s labor market is “healthy,” with real wages rising, he said.
AI adoption is broadening, with 5.9% of companies reporting using AI as of Q3, up from 3.7% in Q3 2023, UBS said, citing the U.S. Census Bureau. “From a single stock perspective, we think many of the large U.S. tech companies offer appealing long-term upside, especially those that have leading positions in the AI value chain.”
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 Focus Growth Strategy stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q3 2024 investor letter:
“We added to several existing positions in the quarter including Adobe Inc. (NASDAQ:ADBE), Workday, Shopify, MSCI, and Paycom Software. We feel Adobe is poised for re-accelerating revenue and earnings growth partially due to the monetization of its Firefly GenAI product embedded in its creative software.”
5. Salesforce Inc (NYSE:CRM)
Number of Hedge Fund Investors: 117
The launch of Agentforce, a platform that enables businesses to create autonomous AI agents, could unlock a multi-billion-dollar opportunity for Salesforce Inc (NYSE:CRM), according to Stifel.
“There is still much Stifel doesn’t know – appetite for headcount displacement, timeline of agent adoption, who will be a serious competitor, etc. – so it is refraining from updating its model until it hears more from the company, early users, and more partners,” said Stifel analyst Parker Lane.
“However, Stifel’s math suggests Agentforce Service Agent alone could be a multi-billion-dollar opportunity for Salesforce,” Lane added.
Stifel has reiterated its Buy rating on Salesforce Inc (NYSE:CRM) and increased its price target on the stock to $350 from $320 as it considers Agentforce a catalyst.
“With the stock currently trading at ~18.4x Stifel’s FY26 FCF estimate, below large-cap peers trading at 20x-40x CY25 FCF estimates, it believes Salesforce’s current multiple discounts the potential durability of revenue growth through the new agent model,” Lane noted.
These agents, which can be used in areas such as customer service, sales, marketing, commerce, and healthcare, are designed to handle complex tasks and produce actionable outputs, Salesforce Inc (NYSE:CRM) says.
“Stifel is still uncertain about several factors—such as demand for workforce reduction, adoption timelines, and key competitors—and will hold off on updating its model until it gathers more information from Salesforce Inc (NYSE:CRM), early users, and partners,” stated Stifel analyst Parker Lane.
“Nonetheless, Stifel’s calculations suggest that Agentforce’s Service Agent alone could represent a multi-billion-dollar opportunity for Salesforce,” Lane added.
Stifel reaffirmed its Buy rating on Salesforce Inc (NYSE:CRM) and raised its price target to $350 from $320, seeing Agentforce as a significant growth driver.
“With the stock trading at about 18.4x Stifel’s FY26 free cash flow estimate, below large-cap peers that are trading at 20x-40x CY25 FCF estimates, Salesforce’s current multiple seems to underestimate the potential for sustained revenue growth through its new agent model,” Lane concluded.
Polen Focus Growth Strategy stated the following regarding Salesforce, Inc. (NYSE:CRM) in its Q3 2024 investor letter:
“In the third quarter, we purchased new positions in Apple and Oracle and eliminated our small positions in Nike and Salesforce, Inc. (NYSE:CRM). We exited our position in Salesforce to fund better opportunities in Shopify and MSCI. Salesforce is seeing slower revenue growth than we would have expected, given the weakening macroeconomic environment. Furthermore, since its core end markets in customer relationship management (“CRM”) and Service are fairly mature, a lower growth level versus our expectations could persist for some time.”
4. Nvidia Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
Mizuho recently raised its price target for Nvidia Corp (NASDAQ:NVDA) to $165 from $140 and reiterated its Outperform highlighting sustained momentum in the artificial intelligence accelerator market ahead of the company’s quarterly results.
Analyst Vijay Rakesh expects Nvidia Corp (NASDAQ:NVDA) to provide guidance for the January quarter in line with forecasts, positioning the company for a “strong” 2025. He pointed to benefits from the GB200 ramp-up in NVL72 and GB300 later in the year. Rakesh also noted that Nvidia Corp (NASDAQ:NVDA)’s entry into the sovereign market could expand in 2025, potentially contributing around $10 billion, or roughly 9-11% of its data center revenue.
Rakesh added that the AI server market now has a total addressable market of over $400 billion, with growth projected to exceed 60% from 2023 to 2027.
Investors will be keenly watching Nvidia Corp (NASDAQ:NVDA) when the company reports its latest quarterly results in a few days.
Nvidia Corp (NASDAQ:NVDA)’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 Corp (NASDAQ:NVDA).
Nvidia Corp (NASDAQ:NVDA) is set to see huge growth on the back of the data center boom amid the AI wave.
At Nvidia Corp (NASDAQ:NVDA)’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.”
3. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
UBS analyst David Vogt said in a recent note that Apple Inc (NASDAQ:AAPL) store’s revenue growth in October was solid. However, he remains cautious amid challenging comps and expectations that iPhone sell-throughs won’t improve as of December.
“However, we remain cautious as the rest of the December quarter faces similarly challenging comps in the ~13% range, while iPhone sell-through is unlikely to accelerate, typically a source of incremental App Store demand.”
Vogt, who has a Neutral rating and a $236 price target on Apple Inc (NASDAQ:AAPL), added that it is “too early” to attribute the strength to Apple Intelligence, given that iOS 18.1 was released on October 28, but noted the growth is a “positive data point” compared to Apple’s guidance for its Services segment.
Polen Focus Growth Strategy stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
The largest relative detractors during the quarter were Apple Inc. (NASDAQ:AAPL), Airbnb, and Tesla (not owned). We added a new position in Apple during the period, which we discuss further in the following section. While Apple is a roughly average-sized position in Focus Growth, it is the largest holding in the Russell 1000 Growth Index, at over 12%, and the stock’s outperformance in the quarter weighed on relative results.
In the third quarter, we purchased new positions in Apple. We owned Apple from early 2009 through late 2016, a period characterized by the massive iPhone-driven growth phase propelling the company’s revenue and earnings to levels almost unseen previously. We moved on from the position in 2016 as we felt Apple had nearly fully penetrated the high end of the smartphone market, which by and large proved correct. Revenue growth has since compounded in the mid-to-high single digits, with earnings growth modestly higher, driven by heavy share buybacks. In the last two years, the company’s revenue and earnings growth has slowed to essentially 0%.
Apple can now upgrade Siri to the true helpful digital assistance consumers hoped it would be all along. Not to mention, the new operating system brings useful new features to not only Apple apps and services but also seamlessly across third-party apps. We believe this means a multi-year upgrade cycle is coming for iPhones that will be unveiled later in 2024 and into 2025. The elongation of the iPhone replacement cycle over the last few years is likely to stop or even reverse, pulling forward stronger revenue, earnings, and free cashflow growth for Apple over the next few years. We expect this to not only accelerate iPhone volume growth but also likely a product mix shifting to higher-priced, higher-margin iPhones. We also expect the AI functionality to be more impactful with bigger screens, processing, and memory. With consumer budgets getting tighter, we feel the new Apple phones with GenAI functionality will become a top priority for consumers versus other areas of spend, which we expect could give a safety-like quality to the acceleration. While the company’s valuation at just under 30x forward earnings is not cheap, we feel the earnings acceleration will allow Apple to generate at least double-digit returns (possibly even mid-teens) over the next few years, earning its place in our Focus Growth Portfolio.”
2. Alphabet Inc (NASDAQ:GOOGL)
Number of Hedge Fund Investors: 216
Jason Helfstein from Oppenheimer last month said Alphabet Inc (NASDAQ:GOOGL) is not a “favored” stock among investors these days because of the regulatory concerns and search threat from ChatGPT. The analyst, who has an Outperform rating on the stock, said both these questions won’t be answered in the short term so Alphabet Inc (NASDAQ:GOOGL) will continue to show they are improving.
“They definitely need to continue to show, to your point, that they’re making improvements with AI, that consumers are using AI and that it is not diluted. Then we can debate, what would the impacts be if they had to end their exclusive search relationship with Apple.”
The analyst said the “bar is so low” for Alphabet Inc (NASDAQ:GOOGL) that he expected the company to post an earnings beat. And that’s exactly what happened.
The results showed that the market has been ignoring Alphabet Inc (NASDAQ:GOOGL)’s key secondary businesses and the stock remains undervalued despite concerns around AI search and regulatory onslaught.
Alphabet Inc (NASDAQ:GOOGL)’s secondary ventures in AI, autonomous driving, and other areas are making solid progress, especially in the Waymo robotaxi segment. Currently, Alphabet Inc (NASDAQ:GOOGL)’s stock trades below 20 times forward earnings, offering potential upside as EPS and other financial metrics strengthen in coming years. For next year, the consensus EPS estimate sits around $9. However, Alphabet Inc (NASDAQ:GOOGL) has consistently beaten projections, delivering $7.54 in trailing twelve-month EPS compared to the expected $6.79—a roughly 11% outperformance.
With the 2025 EPS forecast at around $9, Alphabet (NASDAQ:GOOGL) could realistically achieve earnings closer to $10 if it maintains its historical outperformance rate. At a projected $10 EPS, Google’s forward P/E multiple would be approximately 17, a relatively low valuation for a diversified market leader.
What are the key drivers for Alphabet (NASDAQ:GOOGL)?
Alphabet Inc (NASDAQ:GOOGL) remains on track to reach a $100 billion revenue run rate from YouTube Ads and Google Cloud by the end of 2024. In its autonomous driving division, Waymo has shown notable progress, with paid autonomous rides growing 200% quarter-over-quarter to 150,000 weekly rides as of late October, thanks to a fleet of 700 vehicles in service since August.
This growth is significant: Waymo vehicles now average about 30.6 autonomous rides per day—substantially higher than Uber’s average of 4.18 rides per driver daily, based on Uber’s 31 million daily trips and 7.4 million drivers last quarter. This performance underscores Waymo’s competitive edge in autonomous ride volume compared to traditional ride-hailing.
In the third quarter, Alphabet Inc (NASDAQ:GOOGL)’s Search & Other segment saw a 12.2% year-over-year revenue increase, rising from $44.03 billion to $49.39 billion. YouTube advertising also performed well, with revenue up 12.2% to $8.92 billion from $7.95 billion. Meanwhile, Alphabet Inc (NASDAQ:GOOGL)’s subscriptions, platforms, and devices revenue grew even more sharply, surging 27.8% from $8.34 billion to $10.66 billion.
Google Cloud has been expanding steadily, with revenue climbing from $13.06 billion in 2020 to $33.09 billion in 2023. Notably, Google Cloud turned profitable for the first time in 2023, posting $1.72 billion in operating profit—a significant improvement from a $5.61 billion loss in 2020. This segment’s performance continues to strengthen, with the latest quarterly revenue reaching $11.35 billion, up 35% from $8.41 billion in the same period last year.
Cooper Investors Global Equities Fund (Hedged) stated the following regarding Alphabet Inc. (NASDAQ:GOOGL) in its Q3 2024 investor letter:
“Alphabet Inc.’s (NASDAQ:GOOGL) operating performance remains strong with sales growing 14% in the most recent quarter. Highlights included the ongoing secular growth of digital advertising driving Google search (+14%), YouTube’s continued success as a leading content platform (+13%) and the performance of the Cloud business (+29%). In conjunction with this strong sales momentum, Alphabet’s increased focus on expenses is delivering margin expansion such that Operating Income grew 26%.
Despite this operational momentum, Alphabet’s share price declined 11% in the quarter as a federal judge ruled against the company in its case with the US Department of Justice. The case pertains to Google’s monopolisation of both the search and digital advertising markets which is claimed to limit competition and innovation and/or in
Potential remedies include prohibiting exclusive agreements which make Google the default search engine on Apple or Samsung devices, forcing Alphabet to share its advertising technology with rivals, or in the extreme breaking the company apart. The timing and outcomes remain somewhat uncertain however we remain of the belief that at the fundamental level Alphabet’s products are best of breed across several verticals and are benefitting from secular industry trends and that these factors will be the ultimate determinant of long-term shareholder returns.”
1. Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Investors: 308
Brent Thill from Jefferies recently said in a program on CNBC that while he is bullish on Amazon.com Inc (NASDAQ:AMZN) in the long term, the market’s concerns around Amazon’s Cloud margins are warranted. However, he believes Amazon.com Inc (NASDAQ:AMZN) is going through a ‘tactical change’ and will be able to solve these issues in the long term.
“On margin, so, I think all the fears are warranted, and certainly, they’ve been saying this, they can’t sustain a 36%, 37% margin at AWS. We have margins going into the low 30s, the rest of the Street already has that forecasted, so, I think part of this is expected, and then part of it is, like, are we going to open up the closet and is it going to be, you know, something scary or — and long-term, or is this going to be a short-term impact.”
The analyst also said investors should “brace” for further margin declines.
“Income could fall in the interim, given what’s happening. In the front half of the year, two-thirds of Amazon’s profitability is from AWS, and the margins were unsustainable at 37%, 36%, so, margins will fall in the back half of the year in Amazon AWS.
They’re getting ready for A.I., they’re about to launch satellites to help, you know, in rural areas to get access to help those businesses and consumers, you know, there’s an advanced investment, as we go into the holiday season. So, I think given the outperformance and the margin, remember, they have been beating pretty big on that income.
So, I think that most of us all have that in our model. So, we believe tactically it’s important to call that out, that some of the margins in their most profitable business is probably unsustainable in front of the biggest A.I. wave that we’re seeing. So, I think everyone should be braced for that.”
Amazon.com Inc (NASDAQ:AMZN) threw it out of the park with its latest quarterly results amid strong Cloud growth. Amazon Web Services has generated $27.5 billion in revenue, marking a 19% year-over-year increase. The segment’s operating income is expanding at nearly 2.5 times the rate of its revenue growth, boosting Amazon.com Inc (NASDAQ:AMZN)’s overall operating income. At this pace, AWS is on track to deliver $110 billion in annualized revenue. If it maintains its ~20% growth rate, AWS could reach $125-130 billion in revenue in FY 2025.
For the ongoing quarter, Amazon.com Inc (NASDAQ:AMZN) expects revenue between $181.5 billion and $188.5 billion, implying growth of up to 11%. Amazon.com Inc (NASDAQ:AMZN)’s stock currently trades at a forward P/E of 32.9, higher than the big tech average of 25.5. If Amazon.com Inc (NASDAQ:AMZN) grows its earnings per share (EPS) by an average of 25% annually over the next three years, it could achieve an EPS of around $9.25 by FY 2027 (up from an estimated $4.74 in FY 2024). Applying a 35x P/E ratio in line with Amazon.com Inc’s (NASDAQ:AMZN) historical average suggests a fair stock value of over $300. The primary catalyst for this target would be AWS’s robust operating income growth.
Polen Focus Growth Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“The largest absolute detractors were Alphabet, Airbnb, and Amazon.com, Inc. (NASDAQ:AMZN). Amazon’s position as a notable detractor speaks more to the size of the position than the magnitude of the underperformance, as the company delivered a solid set of results during the quarter.
We trimmed our positions in Amazon, Alphabet, and Microsoft during the quarter. As we have previously, we trimmed Amazon slightly to bring the weight back to 15% for risk management purposes. We remain very positive on our investment thesis of strong revenue growth and even stronger earnings and free cash flow growth continuing over the next few years.”
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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