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.”
4. NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 186
UBS believes Nvidia Corp (NASDAQ:NVDA) is well-positioned to benefit from the $331 billion market opportunity in the AI Enabling layer, thanks to its GPUs. In the Cloud segment of the Enabling layer, UBS thinks Nvidia Corp’s (NASDAQ:NVDA) DGX offering makes the company a promising player. Nvidia Corp (NASDAQ:NVDA) DGX Cloud is a supercomputing service that gives enterprises access to software and infrastructure required to train advanced models for generative AI. It’s a combination of servers and workstations for optimizing deep learning applications through the use of general-purpose computing on graphics processing units (GPGPU).
On the Intelligence and Application layer of the AI value chain, UBS sees no notable catalyst for Nvidia Corp (NASDAQ:NVDA).
NVIDIA Corp’s (NASDAQ:NVDA) latest product announcements and its plans revealed at the Computex 2024 show that NVIDIA Corp (NASDAQ:NVDA) has much more in its arsenal to power its growth engine. Analysts like NVIDIA Corp’s (NASDAQ:NVDA) shift to new AI architecture known as Rubin (R100) and think its powerful H100 and Blackwell chips easily beat competitors.
NVIDIA Corp (NASDAQ:NVDA) will start shipping H200 in the second half of this year. At its GTC conference NVIDIA Corp (NASDAQ:NVDA) revealed three accelerators – B200, GB200 and GB200 NVL72. All of these products provide growth catalysts for NVIDIA Corp (NASDAQ:NVDA) shares and justify its P/E multiple of 71, given NVIDIA Corp’s (NASDAQ:NVDA) growth expectation of over 100% this year and 32% next year. Based on 2026 EPS estimate set by Wall Street, NVIDIA Corp (NASDAQ:NVDA) is trading at a forward P/E multiple of 35.74, which makes the stock’s valuation attractive given the growth catalysts it has.
RiverPark Large Growth Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its first quarter 2024 investor letter:
“NVIDIA Corporation (NASDAQ:NVDA): NVDA shares were our top contributor in the quarter following blowout 4Q results and 1Q guidance driven by strong data center sales. The company reported quarterly revenue of $22.1 billion, up 265% year-over-year, and EPS in the quarter of $5.16, up 487% year-over-year and 12% ahead of expectations. Revenue guidance for 1Q of $24 billion was 8% above very high expectations. The artificial intelligence arms race kicked-off by ChatGPT and Alphabet’s Bard, among others, has generated tremendous demand for Nvidia’s next generation graphic processors.
NVDA is the leading designer of graphics processing units (GPU’s) required for powerful computer processing. Over the past 20 years, the company has evolved through innovation and adaptation from a predominantly gaming-focused chip vendor to one of the largest semiconductor/software vendors in the world. Over the past decade, the company has grown revenue at a compound annual rate of over 20% while expanding operating margins and, through its asset light business model, producing ever increasing amounts of free cash flow. Following recent results, Jensen Huang, founder and CEO of NVIDIA stated in the company’s press release, “a trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
3. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 246
In 2023, Meta Platforms (NASDAQ:META) revealed its first-gen inference accelerator the company produced in-house called Meta Training and Inference Accelerator (MTIA). UBS named the accelerator as Meta Platforms’ (NASDAQ:META) strength in the AI Enabling layer, while Llama and advertising are social media giant’s moat points in the Intelligence and Application layers in the AI value chain.
Why is Meta Platforms Inc. (NASDAQ:META) a promising AI stock? The social media giant is using AI for optimizing ad targeting and recommendation systems to boost engagement and ads revenue. In the first quarter, Meta Platforms Inc’s (NASDAQ:META) revenue jumped 27% to $36.5 billion. A whopping 97% of this revenue came courtesy of ads. In 2024, Meta Platforms Inc’s (NASDAQ:META) ads revenue is expected to rise by 17%. Reels, which is posting solid numbers and engagement lately, saw a 20% ad load in the first quarter, compared with 16.2% in the same quarter last year. Meta Platforms Inc (NASDAQ:META) recently posted speculator Q1 results but the stock slipped after the company revealed that Meta Platforms Inc’s (NASDAQ:META) CapEx will come in the range of $35 billion to $40 billion, higher than the previous forecast of $30 billion to $37 billion. However, long-term analysts believe since most of this spending will go into AI projects, it’ll bode well for the stock down the road.
Based on its 2025 EPS estimate of $23.11 set by Wall Street, Meta Platforms Inc. (NASDAQ:META) is trading at a forward P/E of 21, which makes the stock attractively valued given Meta’s earnings are expected to grow 14.50% next year and by 30% over the next five years on a per-annum basis.
RiverPark Large Growth Fund stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its first quarter 2024 investor letter:
“Meta Platforms, Inc. (NASDAQ:META): Meta was a top contributor in the quarter following fourth quarter earnings results in which the company reported accelerating revenue growth and expanding margins driven by a rebound in online advertising and strong user growth. On February 2nd, Meta reported 4Q23 revenue of $40.1 billion (+25% y/y up from +23% in 3Q23) and EPS of $5.33 (+203% y/y), and the midpoint of 1Q24 revenue guidance was $35.8 billion (+25% y/y), all well ahead of investors’ expectations. The company reported impressive revenue acceleration in its core advertising businesses, including new products like Reels and Threads. Advertiser adoption of Meta’s AI targeting tools helped drive strong ROI and higher spend across multiple categories.
META owns multiple social media platforms, each with more than one billion users, has an 81% gross margin, and generated $44 billion of FCF in 2023. Both its Facebook and its Instagram franchises have more than 2 billion Daily Active Users and generate the bulk of the company’s revenue. Recently, the company’s short form video offering, Reels, and public text-sharing app, Threads, achieved mass user engagement and growing advertiser adoption which have helped return the company to strong revenue and free cash flow growth. Even after the recent stock price advance, META shares trade at 20x Wall Street’s consensus estimates for 2025 EPS, estimates that we think could prove to be too low.”
2. Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 293
Last year, The Information reported that Microsoft Corp (NASDAQ:MSFT) was working on its own AI chips under a project codenamed “Athena,” to cut its reliance on Nvidia. UBS said in its latest report that Athena chips, along with Azure, position Microsoft Corp (NASDAQ:MSFT) to benefit from the opportunities in enabling layer in the AI value chain, while the firm named the company’s OpenAI investment as an opportunity in the intelligence layer. Copilot, Office and GitHub will help Microsoft Corp (NASDAQ:MSFT) profit in the application layer of AI, UBS believes.
Many Wall Street analysts are bullish on MSFT. New Street Research started covering the stock with a Buy rating. The firm said that Microsoft Corp (NASDAQ:MSFT) is well positioned to grow profit in the “low teens for years to come” even if the AI revolution fails to pan out. New Street Research has a $570 price target on Microsoft Corp (NASDAQ:MSFT).
Analysts believe Microsoft Corp’s (NASDAQ:MSFT) AI ecosystem around its products would strengthen its Cloud division thanks to Microsoft Corp’s (NASDAQ:MSFT) integration of AI into its Cloud products. Microsoft Corp’s (NASDAQ:MSFT) Intelligent Cloud segment’s profit in the latest quarter totaled $12.51 billion, a whopping 32% growth on a YoY basis.
Microsoft Corp’s (NASDAQ:MSFT) huge investments to revive its Search business are also working. Bing’s market share has jumped to 3.64% as of April 2024, a 0.88 points gain on a YoY basis.
Wall Street expects Microsoft Corp’s (NASDAQ:MSFT) earnings to grow 12.50% next year. The stock’s forward P/E of 31 based on 2025 EPS makes it look attractive at the current levels. Average analyst estimate for Microsoft Corp (NASDAQ:MSFT) is $483, which presents a 14% upside potential from the current levels.
Baron Fifth Avenue Growth Fund stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its first quarter 2024 investor letter:
“Our second largest purchase during the quarter was the software platform, Microsoft Corporation (NASDAQ:MSFT), which we continued to add to, after initiating a position in the fourth quarter of 2023. Microsoft continues to report strong quarterly results, with revenue growth of 16% year-over-year in constant currency thanks to better-than-expected demand in its intelligent cloud segment, which saw revenue growth of 19% year-over-year, driven by Azure growth of 28% with AI contributing 6pts to growth compared with 3pts in the prior quarter. While the adoption of GenAI remains in its early stages, Microsoft has disclosed positive initial data points with 53,000 Azure AI customers as of its December quarter up from 18,000 in the prior quarter, 1.3 million paid GitHub Copilot subscribers (up 30% sequentially) and more than 230,000 organizations who have used AI capabilities in the power platform (up 80% sequentially). Management also noted that large cloud optimizations that started a year or so ago have largely finished. Profitability also continues to be strong with 44% non-GAAP operating margins, which was 120bps better than expected.”
1. Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Investors: 302
Investment firm UBS in a latest report named Trainium and Inferentia as Amazon.com Inc’s (NASDAQ:AMZN) strengths in the AI Enabling layer to profit from the $1.16 trillion opportunity. Trainium is a machine learning (ML) chip that AWS purpose-built for deep learning (DL) training of 100B+ parameter models. Inferentia is an AI accelerator for deep learning (DL) and generative AI inference applications.
Amazon Web Services is another major factor that makes Amazon.com Inc (NASDAQ:AMZN) well positioned in the Enabling layer of the AI value chain. However, UBS believes Amazon.com Inc (NASDAQ:AMZN) doesn’t have any offering in the Intelligence layer of the AI value chain. The firm labeled “chatbot recommendations” as Amazon.com Inc’s (NASDAQ:AMZN) strength in the application layer of AI.
Amazon.com Inc (NASDAQ:AMZN) is becoming an AI power house thanks to its AWS business, which saw operating margins cross 37% during the first quarter. AWS operating margins have now came in more than 30% for the past five straight quarters. Amazon.com Inc’s (NASDAQ:AMZN) revenue in the first quarter jumped 12.5% YoY and its adjusted EPS more than tripled. Revenue in North America and International segments grew as well. Analysts believe digital ads is another strong revenue stream for Amazon.com Inc (NASDAQ:AMZN), with revenue from the segment increasing 24% YoY to $11.8 billion in the first quarter.
Baron Fifth Avenue Growth Fund stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its first quarter 2024 investor letter:
“Amazon.com, Inc. (NASDAQ:AMZN) is the world’s largest retailer and cloud services provider. Shares increased 18.7% on quarterly results that exceeded consensus expectations, with revenue growth of 13% year-over-year and operating margins of 7.8% (up from 1.8% a year ago). We believe that Amazon is well positioned in the short to medium term to continue improving its core North American margins, which have reached 6.1% in the fourth quarter, the seventh straight quarter of margin improvement and an overall improvement of 800bps. Amazon has been rearchitecting its fulfillment network, improving efficiency, reducing cost-to-serve and accelerating delivery speeds thanks to initiatives such as regionalization, with the number of items delivered during the same day or overnight increasing by nearly 70% year-over-year. Reducing the cost to serve also enables Amazon to sell lower priced items and expand its addressable market to everyday purchases. Additionally, Amazon continues to benefit from its fast-growing, margin-accretive advertising business winning market share in digital advertising thanks to its structural advantages of a closed loop system, which enables a deterministic calculation of Return on Ad Spending. We also believe that e-commerce still has long duration growth ahead as it still accounts for less than 15% of retail. Similarly, Amazon’s cloud service, AWS, remains relatively early in its S-curve with cloud representing around 13% of worldwide IT spending13 incremental tailwinds across the three layers of the GenAI stack – infrastructure with NVIDIA’s own AI chips (Trainium and Inferentia) as well as with its offering of NVIDIA chips, platform (Bedrock), and applications (first and third party).”
While we acknowledge the potential of AMZN as an AI play, our conviction lies in the belief that some 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.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
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