In this article, we will take a detailed look at the 10 best AI stocks that can benefit from a new $1.2 trillion opportunity highlighted by UBS in a latest report.
UBS Global Wealth Management’s (GWM) recently published a detailed report discussing different layers of the AI “value chain,” estimating the combined market value opportunity from the layers at $1.2 trillion by 2027.
UBS segments the AI market into three layers – Enabling Layer, Intelligence Layer and Application Layer. The enabling layer is what actually powers the AI ecosystem — infrastructure, GPUs, data centers, Cloud, servers. UBS further divided this layer into two segments, Infrastructure and Cloud. The firm expects a combined $516 billion revenue opportunity from the enabling layer by 2027.
Next up is the intelligence layer, which acts as the brain of the entire AI ecosystem. Large language models and backed software systems sit at this layer. UBS estimates that this layer presents a $225 billion opportunity by 2027.
The third layer in the AI market highlighted by UBS is the application layer. This is where the end user comes in. Cloud, data centers, GPUs, LLMs and algorithms amount to nothing if the end user cannot benefit from their huge processing power. UBS said estimating monetization opportunity of this layer was the hardest since it’s still in its very early stage. The application layer addresses actual AI software used by customers — think AI assistants, GitHub CoPilot, marketing, customer service software, etc. UBS expects a whopping $395 billion in revenue opportunities for the application layer by 2027.
Key AI Predictions
The UBS report also made key “predictions” about the AI landscape. The firm’s analysts believe the race to achieve artificial general intelligence (AGI) could give rise to a “capex cycle” that could “inflate” the AI investment bubble. UBS sees the dominance of a few companies in the AI industry will continue to be a reality moving forward, as it expects “monolithic players” and “AI foundries” prevailing in the near future.
Based on this report, let’s take a look at the top companies that will directly benefit from this $1.16 trillion opportunity by 2027. For this article we analyzed UBS analysis and picked 10 stocks that are directly exposed to the three layers in the AI ecosystem highlighted by UBS in its latest report. These companies are positioned extremely well to benefit from the monetization opportunities in the enabling, intelligence and application layers of the AI market. 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. Baidu Inc (NASDAQ:BIDU)
Number of Hedge Fund Investors: 48
According to UBS, Baidu Inc’s (NASDAQ:BIDU) Cloud platform Wangpan positions the company to benefit from the AI spending in the enabling layer, while its Ernie bot is what qualifies the company to profit in the intelligence layer in the AI value chain. In the application layer of the AI ecosystem, UBS highlighted Comate, Baidu Inc’s (NASDAQ:BIDU) programming aided tool based on its large language model ERNIE.
Baidu Inc (NASDAQ:BIDU) is a Chinese internet giant often known as the “Google of China.” Baidu Inc’s (NASDAQ:BIDU) business has two main segments: Baidu core, its PPC ads platform, and iQIYI (IQ), its video streaming platform. Baidu Inc (NASDAQ:BIDU) Core in the first quarter saw revenue growth of 4% while its adjusted operating margin came in at 23.5%. Baidu AI Cloud’s revenue in the period jumped 12%. Baidu Inc’s (NASDAQ:BIDU) business is highly diversified. The company has a portfolio of 12 apps, including Baidu App, Ernie Bot and Baidu Post. Its autonomous driving and EV initiatives are also bearing fruit. Baidu Inc (NASDAQ:BIDU) recently said its Apollo Go robotaxi arm is close to breaking even and likely to turn a profit in 2025.
Baidu Inc (NASDAQ:BIDU) bulls believe the stock is trading at an attractive valuation. Baidu Inc (NASDAQ:BIDU) has generated FCF of about $3.5 billion over the past 12 months. Analysts expect Baidu’s earnings to grow 20% over the next 12 months and rise further in 2026. The stock is trading at a forward P/E ratio of 8.26, much lower than the industry average of 12.62 and also Baidu Inc’s (NASDAQ:BIDU) five-year average P/E of 16.82.
Ariel Global Fund stated the following regarding Baidu, Inc. (NASDAQ:BIDU) in its first quarter 2024 investor letter:
“Alternatively, several positions weighed on performance. China’s internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI’s ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China’s economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu’s longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.”
9. Vertiv Holdings Co (NYSE:VRT)
Number of Hedge Fund Investors: 85
UBS said in its latest report that the Infrastructure part of the AI Enabling layer is exposed to a $331 billion value creation opportunity by 2027. Data centers account for a major part of this layer, according to the investment firm. Vertiv Holdings Co (NYSE:VRT) is one of the best AI data center stocks to buy now based on hedge fund sentiment and growth catalysts.
Vertiv Holdings Co (NYSE:VRT) shares are already up 100% so far this year. The stock jumped in April after Vertiv Holdings Co (NYSE:VRT) increased its guidance, citing AI-related data center growth. For the full-year 2024, Vertiv Holdings Co (NYSE:VRT) expects its revenue to come in the range of $7.54 billion and $7.69 billion, compared to the previous estimate of $7.52 billion to $7.66 billion.
Vertiv Holdings Co (NYSE:VRT) is a market leader in the data center power and cooling market, which has nowhere to go but up from here since companies are hungry for data center solutions as they begin to deploy AI software. During the first quarter the company saw a 60% increase in organic orders. For full-year, the company plans to increase its CapEx to $200 million, which is high, but still in the company’s CapEX margin range between 2.5% to 3%. Vertiv also upped its revenue guidance. Here’s what the management said during the latest earnings call:
“We are expecting organic sales growth of approximately 12% with Americas up mid-teens, APAC high single digits and EMEA low double digits. We anticipate an $18 million year-over-year foreign exchange headwind in the second quarter as the U.S. dollar has strengthened against most foreign currencies over the last several months. We expect second quarter adjusted operating profit between $315 million and $335 million and adjusted operating margin of 16.9%, up 240 basis points at the midpoint with expected benefits from price/cost partially offset by continued growth investments.
Based upon a favorable start to the year and visibility into a strong sales pipeline for the rest of the year, we are increasing estimates for organic sales growth from 10% at the midpoint to approximately 12% with higher expectations across all 3 regions. In addition, we are increasing the midpoint of adjusted operating profit guidance from $1.3 billion in our prior guidance to $1.35 billion primarily driven by contribution margin on incremental sales. And as a result, we are increasing midpoint guidance for adjusted operating margin to 17.7% with the primary driver there being fixed cost leverage.”
Vertiv Holdings Co (NYSE:VRT) earnings are expected to grow 35% this year, while the Wall Street expects a 28% growth next year. Based on these growth estimates, Vertiv’s forward P/E ratio of 37.45 looks attractive.
Alger Mid Cap Growth Fund stated the following regarding Vertiv Holdings Co (NYSE:VRT) in its first quarter 2024 investor letter:
“Vertiv Holdings Co (NYSE:VRT) specializes in critical cooling and power management infrastructure technologies, catering primarily to data center clients. As an industry leader in data center power and cooling solutions, we believe Vertiv stands to benefit from the secular growth in data and computing needs. During the quarter, shares contributed to performance driven by strong operating results and-increasing investor expectations for Al implementation driving more data center demand. Given its leading position, we anticipate Vertiv will demonstrate accelerated revenue and earnings growth as the demand for computing, particularly for Al applications. continues to rise.”
8. Alibaba Group Holding Ltd (NYSE:BABA)
Number of Hedge Fund Investors: 103
UBS is bullish on Alibaba Group Holding Ltd’s (NYSE:BABA) exposure to AI because of Alibaba Cloud, or Alibaba Cloud, which makes the Chinese company a formidable player in the AI enabling layer. In the intelligence layer, UBS highlighted Alibaba Group Holding Ltd’s (NYSE:BABA) Qwen large language model, while the Qwen agent makes the company’s presence notable in the application layer.
However, uncertainties in China and Alibaba Group Holding Ltd’s (NYSE:BABA) lackluster performance have damaged the sentiment around the stock. While Alibaba Cloud is a significant player in the market, analysts believe enormous growth and advancements of Alphabet, Amazon and Microsoft in the public Cloud markets have left Alibaba Goup Holding Ltd (NYSE:BABA) behind. Wall Street analysts expect Alibaba earnings to grow at a CAGR of just 1.7% only over the next five years. Alibaba Goup Holding Ltd’s (NYSE:BABA) forward PEG ratio is 3.29, which is high when we incorporate the unimpressive earnings growth expectations.
Alibaba Group Holding Ltd’s (NYSE:BABA) ecommerce business is also struggling as buyers in China become price-conscious amid a broader slowdown. However, Alibaba Group Holding Ltd (NYSE:BABA) bulls believe the stock could rebound if the situation improves in the country, given the company’s massive cash flow position. Alibaba Group Holding Ltd (NYSE:BABA) finished fiscal 2024 with a whopping $34.37 billion in cash on hand, with another $36.42 billion in short-term investments.
In May, Baidu analyst Colin Sebastian said in a note after Alibaba Gorup Holding Ltd’s (NYSE:BABA) quarterly results that the company was gaining “early momentum” as it changes its priorities .
“Alibaba is focused on recapturing e-commerce market share in China, and capitalizing on momentum in international commerce and cloud computing building on strong growth in cross-border volumes, and accelerating revenues in public cloud,” the analyst said.
Sebastian has an Outperform rating on the stock and an $85 price target.
Artisan Select Equity Fund stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its fourth quarter 2023 investor letter:
“Pretty much all of our holdings rose during the quarter. Only one stock declined by more than a couple of percent—Alibaba Group Holding Limited (NYSE:BABA), which was down 9% for the quarter and 12% for the year. This investment continues to be a disappointment. We estimate the shares are trading at around 5X EBITA—a valuation normally reserved for a company with evaporating profits. While it’s true Alibaba is underperforming its peers in the market, the fact is it remains the market leader in its core businesses, and the business is still growing. In the most recent quarter, revenues grew 9% and profits grew 26%.It’s not evaporating.
The management seems to be making meaningful changes designed to enhance shareholder value, including structural changes to improve profitability and restore its competitive position. It is monetizing non-core assets and making improvements in capital allocation. A lot of good things are happening that are not yet recognized in the share price. There are reasons—primarily geopolitical—for this, but at the current valuation, we could easily see the shares double and they would still be cheap.”
7. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
UBS estimated in its latest report that the AI data center business, which includes GPUs, memory chips, interconnects, is sitting on a $331 billion opportunity. Broadcom Inc (NASDAQ:AVGO), being one of the top semiconductor companies, is exposed to this opportunity.
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%.
Carillon Eagle Growth & Income Fund stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its first quarter 2024 investor letter:
Broadcom Inc. (NASDAQ:AVGO) continues to trade higher as a beneficiary of generative artificial intelligence (AI). Management recently highlighted that AI-related silicon now comprises a significant percentage of all semiconductor solution sales. The company also is focused on integrating its acquisition of VMware.
6. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Investors: 124
While UBS didn’t name Advanced Micro Devices, Inc. (NASDAQ:AMD) in its list of stocks set to benefit from the AI value chain, the stock is clearly exposed to the $331 billion spending opportunity in the AI Enabling layer (infrastructure segment including chips, GPUs) UBS highlighted in its report. UBS said that 70% of the bill of materials of an AI server is made up of GPU costs. The UBS report also quoted a Financial Times report according to which Advanced Micro Devices, Inc. (NASDAQ:AMD) CEO Lisa Su said last year that AI chips will make up USD 400bn of the semi industry’s global revenues by 2027.
Citi analyst Christopher Danely recently said Advanced Micro Devices, Inc. (NASDAQ:AMD) is using its “annual product cadence” to keep up with Nvidia. Danley has a $176 price target on Advanced Micro Devices, Inc. (NASDAQ:AMD).
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) server chips are built on Zen5 core CPU architecture.
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.”
5. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
According to the latest UBS report, Alphabet Inc (NASDAQ:GOOG) falls in all three layers of the AI value chain – enabling, intelligence and application layer. Alphabet Inc (NASDAQ:GOOG) is an AI enabling player because of its Tensor Processing Units (TPUs) and Google Cloud Platform, while Gemini makes it a key player in the intelligence layer. On the application layer, UBS believes Alphabet Inc (NASDAQ:GOOG) has an edge with its Duet AI assistant and advertising. All these catalysts make Alphabet Inc (NASDAQ:GOOG) a company that could benefit from the $1.2 trillion AI opportunity by 2027, UBS said.
Alphabet Inc. (NASDAQ:GOOG) bulls believe the market is not incorporating Alphabet Inc.’s (NASDAQ:GOOG) growth in Cloud, Other Bets, Video and other high growth initiatives. The stock is trading 20x Alphabet Inc.’s (NASDAQ:GOOG) 2025 EPS estimate of $8.57. This multiple makes the stock look attractively valued since the Wall Street expects Alphabet Inc. (NASDAQ:GOOG) earnings to grow by 13.40% in 2025 and by 19% over the past five years on a per annum basis.
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.”
