In this article, we will take a detailed look at the 10 Best AI Momentum Stocks to Benefit from Volatility Ahead.
Wolfe Research has joined the ongoing market correction chorus as more and more experts warn of volatility ahead amid soaring valuations led by AI. Wolfe Research, however, believes investors would stick to mega-cap tech stocks to survive through this volatility.
“Our sense is that volatility will continue to pick up over the summer. However, we expect this to generally benefit the Mag 7, secular growers, and the overall Momentum Trade in the weeks ahead.”
Wolfe analysts expect investors to pile into quality stocks that “they can count on” amid economic “data surprises” ahead. The firm expects “these themes to continue to benefit from an environment in which growth is slowing but the Fed is expected to kick off a deep cutting cycle.”
“Further, our sense is that the biggest companies driving these trends will once again put up very solid results during 2Q earnings season.”
Since Wolfe believes investors are poised to stick with Magnificent Seven stocks in the upcoming volatility and called The Information Technology (SPG1200-45)(XLK) and Communication Services (XLC) “big winners”, we picked Mag. 7 stocks and top 3 AI stocks from the XLK for this article. 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).
10. Tesla Inc (NASDAQ:TSLA)
Number of Hedge Fund Investors: 74
Despite comparative lackluster performance, TSLA is still a part of the Mag. 7 group, which Wolfe Research believes would remain investor favorite even during volatility this summer.
Dan Ives of Wedbush shocked everyone recently when he said during an interview with CNBC that Tesla Inc (NASDAQ:TSLA) is the “most undervalued AI play” right now. Ives thinks the “AI component” of Tesla could be worth between $1 trillion to $2 trillion.
Ives is banking on August 8 as a “historical day” for Tesla Inc (NASDAQ:TSLA). Musk is slated to unveil his robotaxi plan on August 8, which he chalked out after reportedly scrapping off his previous plan to launch an affordable EV for the mass market.
Ives said that Tesla Inc (NASDAQ:TSLA) could “double” over the next 12-18 months because of its fully autonomous driving plans that will take shape in the coming months.
Ives thinks Tesla has gone through a “Category 5 Hurricane” amid softer demand for EVs especially in China, but the analyst thinks the “Cinderella Story” will return to Tesla Inc (NASDAQ:TSLA) and AI will be the “king.” The analyst said the softening demand for EVs called for an “adult in the room” situation at Tesla, and Elon Musk “stepped up” and took the necessary steps which could bode well for Tesla Inc (NASDAQ:TSLA). He was referring to the massive layoffs announced by Tesla recently which have caused a 14% downsizing at Tesla Inc (NASDAQ:TSLA).
Baron Partners Fund stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its first quarter 2024 investor letter:
“The vast majority of the Fund’s underperformance this quarter stemmed from the Fund’s 10-year investment in Tesla, Inc. (NASDAQ:TSLA). Tesla’s shares fell 29.3% during the period and detracted 13.41% from the Fund’s first quarter results. Although Tesla has contributed importantly to the Fund’s performance since 2014, on occasion it has detracted from quarterly performance. In previous instances when Tesla shares have underperformed during a discrete period, they have shortly afterwards reflected the strong growth of the underlying business and the stock has appreciated considerably. We believe that will be the case again, although cannot guarantee it.
A significant decline also occurred at the end of 2022. In that instance, investors had become concerned about a host of external factors. Investors believed the company founder, visionary, and CEO Elon Musk was distracted by his acquisition of Twitter. They also believed a weak Chinese economy emerging from COVID and U.S. government policies would curtail the purchases of Tesla vehicles. These fears proved to be overblown. As the company achieved milestones in the succeeding year, the stock subsequently doubled over the next 12 months.
9. Qualcomm Inc (NASDAQ:QCOM)
Number of Hedge Fund Investors: 78
QCOM is a notable AI holding of the The Technology Sector Fund (XLK), which Wolfe believes is a “big winner” this year.
QUALCOMM Inc (NASDAQ:QCOM) was seen as a laggard in the AI arms race but all of a sudden the stock has a new growth catalyst: AI PCs. Microsoft has announced that its Surface Laptop and Surface Pro will be powered by QUALCOMM Inc (NASDAQ:QCOM) chips. These devices can run several AI tasks without the internet. QUALCOMM Inc (NASDAQ:QCOM) is a key partner of Microsoft to deliver Copilot+ PCs.
As of the end of the first quarter of 2024, 78 hedge funds out of the 919 funds tracked by Insider Monkey reported owning stakes in QUALCOMM Inc (NASDAQ:QCOM).
In addition to AI PCs, AI smartphones is another emerging growth catalyst for QUALCOMM Inc (NASDAQ:QCOM). The company’s Snapdragon 8 Gen 3 Mobile Platform can power smartphones to process up to 10 billion parameters of generative AI models, effectively making them intelligent personal assistants.
Wall Street expects Qualcomm’s revenue to grow 10% in 2025 and earnings to rise by 13.10% in the year. Despite these growth catalysts, QUALCOMM Inc (NASDAQ:QCOM) is trading at a forward P/E of 18.42, lower than the industry median of 23.73.
ClearBridge Small Cap Value Strategy stated the following regarding QUALCOMM Incorporated (NASDAQ:QCOM) in its first quarter 2024 investor letter:
“Another theme of that era was mobile telephony. QUALCOMM Incorporated (NASDAQ:QCOM) soared over 2,600% in 1999 on a very similar premise as Nvidia is seeing now — it was the brains behind the secular trend, so whoever won, Qualcomm would participate. The theme was spot on, the company was perfectly positioned, and it went on to perform massively well. From 1999 to 2023, Qualcomm’s sales rose more than 9x and EBITDA 12x, very impressive long-term growth rates. Investors who held the stock during that period, however, received a total return of only 154%, underperforming the 410% return of the S&P 500 Index.”
8. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
AVGO is a key part of the The Technology Sector Fund (XLK), which Wolfe thinks is a “big winner.”
JPMorgan in a latest report said that Broadcom Inc (NASDAQ:AVGO) can “dominate” the high-end of the custom chips market. JPMorgan expects the high-end of the application-specific integrated circuit, or ASIC, market to reach anywhere between $20 billion and $30 billion, up from its previous estimate of $20 billion to $25 billion.
While Broadcom Inc (NASDAQ:AVGO) is directly exposed to the AI semiconductor market, some believe the stock is priced for perfection, with a P/E multiple of 52 and YTD share price gain of 30%. In the first quarter Broadcom Inc (NASDAQ:AVGO) saw a 34% revenue growth, which surprised the Wall Street. However, adjusted earnings clocked in growth that was significantly less than revenues, indicating limited margins. Broadcom Inc’s (NASDAQ:AVGO) EV/EBITDA is 22.5, much higher than its five-year average of 14 and sector median of 14. Broadcom Inc’s (NASDAQ:AVGO) debt levels are also worrying for many. It has $73,429 million in long-term debt and $2,374 million in current debt. Broadcom Inc’s (NASDAQ:AVGO) revenue growth is expected to come in at 13% next year and 15.10% over the next five years on a per-annum basis. This means Broadcom Inc (NASDAQ:AVGO) is a laggard when compared to industry leaders like NVDA. The stock’s one-year average analyst price estimate set by Wall Street is $1533, representing an upside potential of just 9%.
ClearBridge Global Growth Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its first quarter 2024 investor letter:
“Among secular growth names, Broadcom Inc. (NASDAQ:AVGO) was another notable addition. Through organic growth and accretive acquisitions, Broadcom has developed into one of the largest global technology providers serving a number of industries with its semiconductor and software products. The company generates high levels of earnings and free cash flow, which will be driven in the coming years by revenue growth and margin expansion due to the acquisition of VMware and strong adoption of the Broadcom’s AI custom silicon chips. The acquisition of VMware is off to a good start and has shifted the business mix to 60% software and 40% semiconductors, enhancing growth prospects while also providing greater downside protection from higher recurring revenue.”
7. Advanced Micro Devices Inc (NASDAQ:AMD)
Number of Hedge Fund Investors: 124
AMD is a notable part of the Technology Fund (XLK), which is a “big winner” this year according to Wolfe, and many Wall Street analysts are growing bullish on the stock.
Bank of America thinks AMD is one of the best best of breed stocks to buy for the third quarter of 2024.
Advanced Micro Devices Inc. (NASDAQ:AMD) is a pioneer when it comes to AI PCs. Advanced Micro Devices Inc. (NASDAQ:AMD) announced AMD Ryzen 7040 in January last year. It was the first chip to have built-in AI acceleration. Advanced Micro Devices Inc. (NASDAQ:AMD) later launched Ryzen 8040. Laptops powered by AMD’s Ryzen AI 300 series are expected to hit the market by July this year.
Advanced Micro Devices Inc. (NASDAQ:AMD) is also a strong player in the data center space. Advanced Micro Devices Inc. (NASDAQ:AMD) has teased 5th Generation Epyc Gen CPUs (codename Turin) and their Instinct MI-300 series GPU accelerators. Advanced Micro Devices Inc.’s (NASDAQ:AMD) serve chips are built on Zen5 core CPU architecture.
Average analyst estimate for Advanced Micro Devices Inc. (NASDAQ:AMD) is $187.2, which presents an upside potential of 17%. Wall Street analysts expect Advanced Micro Devices Inc. (NASDAQ:AMD) to grow 33% this year and 59% next year. For the next five years the growth will then moderate to 32% on a per-annum basis, which is still high. Based on Advanced Micro Devices Inc.’s (NASDAQ:AMD) 2025 EPS forecast, the stock is trading at around 28.6X forward P/E ratio, which isn’t high given Advanced Micro Devices Inc.’s (NASDAQ:AMD) growth trajectory and catalysts.
Meridian Contrarian Fund stated the following regarding Advanced Micro Devices, Inc. (NASDAQ:AMD) in its fourth quarter 2023 investor letter:
“Advanced Micro Devices, Inc. (NASDAQ:AMD) is a global semiconductor chip maker specializing in central processing units (CPUs), which are considered the core component of most computing devices, and graphics processing units (GPUs), which accelerate operations running on CPUs. We invested in 2018 when it was a mid-cap value stock plagued by many years of underperformance due to lagging technology and lost market hi share versus competitors Intel and Nvidia. Our research identified that changes and investments made by current management under CEO Lisa Su had, over several years, finally resulted in compelling technology that positioned AMD as a stronger competitor to Nvidia and that its latest products were superior to Intel’s. We invested on the the belief that AMD’s valuation at that that time did not reflect the potential for its technology leadership to generate significant market share gains and improved profits. This thesis has been playing out for several years. During the quarter, AMD unveiled more details about its upcoming GPU products for the AI market. The stock reacted positively to expectations that AMD’s GPU servers will be a viable alternative to Nvidia. Although we pared back our exposure to AMD into strength as part of our risk-management practice, we maintained a position in the stock. We believe AMD will continue to gain share in large and growing markets and is reasonably valued relative to the potential for significantly higher earnings.”
6. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 150
Wolfe Research believes the Mag. 7 group of stocks is poised to benefit from any volatility this summer. Since Apple is part of the group, the stock should be watched closely.
Apple Inc (NASDAQ:AAPL) skeptics have long believed that Apple Inc (NASDAQ:AAPL) is a laggard in the AI race, but experts say Apple Inc (NASDAQ:AAPL) almost always makes its own way and Apple Inc (NASDAQ:AAPL) will come roaring back in the AI competition and surpass Microsoft and Alphabet. The first signs of Apple Inc’s (NASDAQ:AAPL) AI capabilities are here. Last month, Apple Inc (NASDAQ:AAPL) revealed new M4-powered iPad Pro and claimed that its devices, powered by Neural Engine, will be “more powerful than any neural processing unit in any AI PC today.” Apple Inc’s (NASDAQ:AAPL) Neural Engine is Apple Inc’s (NASDAQ:AAPL) neural processing unit (NPU) that accelerates AI workloads.
After the latest AI announcements at the WWDC event, Apple Inc. (NASDAQ:AAPL) shares added over $215 billion in market cap and closed at a record high on June 11. TF International Securities analyst Ming-Chi Kuo said in a fresh note that Apple has a competitive edge over others with its on-device AI.
Notable Wall Street analyst and Deepwater Asset Management Managing Partner Gene Munster recently made waves when he said in a post on Twitter that Apple Inc (NASDAQ:AAPL) is a better investment than Nvidia for the long term. Munster believes owning Apple Inc (NASDAQ:AAPL) over the next year will have a higher return because the market is in “denial” about Apple’s AI potential.
Apple Inc (NASDAQ:AAPL) is trading at 26X its 2025 EPS estimate ($7.22). This multiple, though higher than the industry average of 30, does not show the stock’s overvalued, given Apple Inc (NASDAQ:AAPL) sales growth of 6.40% for fiscal 2025 and 10.50% growth for the next five years on a per-annum basis.
Mar Vista Focus strategy stated the following regarding Apple Inc. (NASDAQ:AAPL) in its first quarter 2024 investor letter:
“Apple Inc.’s (NASDAQ:AAPL) stock was pressured in the quarter as investors fretted over softening demand for smartphones, regulatory action from the US Department of Justice, and the Chinese government mandates restricting iPhone use by government officials. Despite these near-term headwinds, we continue to believe the company remains competitively advantaged and benefits from the Apple ecosystem, which has an installed base of over 2 billion devices and over 1 billion paying subscribers. We believe the Apple ecosystem will support a more predictable cash flow stream, which should grow intrinsic value high-single-digits over our investment horizon.”
5. Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Wolfe believes Mag. 7 stocks like GOOG will see more investor interest this summer amid any volatility.
Alphabet Inc. (NASDAQ:GOOG) bulls believe the company is just getting started with AI product launches. Alphabet Inc. (NASDAQ:GOOG) is indeed in a strong position to develop an AI ecosystem around its products. For example, demos have shown that Gemini app will help people perform daily personal tasks like note taking, appointments, writing, etc. These features could easily be integrate with other Google apps. Alphabet Inc.’s (NASDAQ:GOOG) app is to urge users to sign up for ‘Google One AI Premium’ plan, which has a $19.99 price tag. Google saw advertising revenue accelerate in Q1 2024, boosted by YouTube in particular growing by almost 21% last quarter. Analysts also believe Alphabet Inc. (NASDAQ:GOOG) is in a strong position to offset any headwinds or lost market share in Google search with YouTube, which saw its ads revenue reach $8.1 billion in the first quarter, a 21% growth. Alphabet Inc.’s (NASDAQ:GOOG) net income in the period came in at $23.66 billion, up 57%, or $1.89 per share.
Lakehouse Global Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its April 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) delivered a strong quarterly result that came in well ahead of analysts’ expectations. Revenue grew 15.4% (16.0% constant currency) to $80.5 billion and operating income grew 46.0% to $25.5 billion. Revenue growth accelerated across Search, YouTube Ads, and Google Cloud, all whilst the company delivered its highest operating margin since 2021 – showing meaningful progress in the company’s efforts to durably re-work their cost structure. On the Generative AI front, management emphasised the company’s infrastructure advantages including 5th generation TPUs(chips developed by Google specifically for AI training and inference), high performance data centre architecture, and AI models that are 100x more efficient versus 18 months ago. Overall, we believe that Alphabet is well placed for the AI opportunity ahead and still has significant latent earnings power. When combined with a relatively undemanding valuation of 21x forward net profit and over $100 billion of cash on the balance sheet, it’s not hard to see why we remain positive on the range of outcomes in the years ahead.”