In this article, we will take a detailed look at the 11 Biggest AI Stock Upgrades and Downgrades in July So Far.
As soon as the latest softer-than-expected inflation data numbers were out, investors began to take profits from major tech stocks and pour money into small-cap companies amid hopes of rate cuts. However, some were quick to call the latest decline in tech stocks the end of the AI-fueled rally that has pushed stock valuations to eye-popping levels. But there are some Wall Street analysts who believe this is just a short-term trend and large tech and AI stocks have a lot of room to grow. Samantha McLemore, CIO of Patient Capital, said while talking to CNBC that the “bull market continues and the path of least resistance is higher.”
The analyst said that she has been in the market for a long time and investors have been worrying about the end of the bull market since 2009, while the S&P 500 has grown over 1000% (17% per year) since then.
“We don’t see any end to the bull market. We do think there’s a good chance we see a rotation and small caps, the laggards, do much better in the second half of the year as the Fed starts to cut rates.”
Some analysts believe the latest decline in tech stocks is yet another opportunity for long-term investors to pile into AI stocks for gains. In this backdrop, we decided to take a look at the top AI stock upgrades and downgrades this month. 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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11. Rivian Automotive Inc (NASDAQ:RIVN)
Number of Hedge Fund Investors: 26
Morgan Stanley analyst Adam Jonas thinks Rivian’s AI potential could match that of Tesla’s. Morgan Stanley’s optimistic view on Rivian is that the electric vehicle maker is uniquely positioned, apart from Tesla (TSLA), to scale a fully integrated software stack critical to harnessing the broad AI opportunity. This AI potential could attract investors at a market value 1/60th that of Tesla. The AI factor significantly contributes to Morgan Stanley’s bullish price target of $33 for Rivian Automotive Inc (NASDAQ:RIVN).
Rivian has suddenly become interesting after the company signed a deal with Volkswagen according to which the German company will invest a whopping $5 billion in it for a joint venture to develop next-generation software-defined vehicle platforms.
During the second quarter, Rivian delivered 13,790 vehicles, slightly up from 13,588 in the previous quarter and much higher than 12,640 in the prior-year quarter. Production took a hit as the company’s Illinois plant was closed for about 25 days as it was upgrading it to streamline production processes. Rivian is going through a cost-cutting and efficiency-boosting phase.
Amazon also has a significant stake in the company and Rivian plans to provide the e-commerce giant with 100,000 electric delivery vans (EDVs).
While Rivian is still a loss-making company, it expects to swing to a “modest” profit by the end of this year.
During Q1 earnings call, the management talked about its plans to achieve profitability
“Our gross profit loss per vehicle delivered was approximately $39,000, which includes $15,500 of depreciation and $1,700 of stock based compensation expense. Our results were negatively impacted by approximately $9,300 per vehicle delivered as part of our cost of revenue efficiency initiatives, which we don’t anticipate to be part of our long-term cost structure. We continue to move closer to making money on every vehicle we sell. We expect to see meaningful improvement in our gross profit during the second half of this year and believe we will reach a positive gross profit for the fourth quarter.”
Meridian Hedged Equity Fund stated the following regarding Rivian Automotive, Inc. (NASDAQ:RIVN) in its first quarter 2024 investor letter:
“Rivian Automotive, Inc. (NASDAQ:RIVN) is a US-based manufacturer of electric vehicles, namely the R1T pickup truck and R1S SUV. They also have exposure to the commercial vehicle market with their electric delivery vans (EDVs) that are sold to companies like Amazon. The company has faced challenges amid the broader slowdown in electric vehicle demand and rising interest rates. This has contributed to Rivian underperforming expectations over the past few quarters. Rivian has also incurred losses as it continues to invest in the development of its products and manufacturing capabilities. We own Rivian in a hedged structure, which provides a significant margin of safety. Despite the near[1]term challenges, several factors provide optimism that Rivian can emerge as a long-term winner in the EV market. Rivian’s balance sheet is strong, with a substantial cash position that enables the company to continue investing in its growth and navigate through the current economic headwinds. Rivian is also unveiling the R2, which is a smaller and more affordable EV platform that will open the company’s products to a wider customer base. Lastly, Rivian’s investment in the enhancement of its production capabilities should improve the company’s manufacturing efficiency and drive a path to profitability. We continue to hold the company in a hedged structure.”
10. Absci Corp (NASDAQ:ABSI)
Number of Hedge Fund Investors: 27
Absci Corp (NASDAQ:ABSI) is one of the biggest AI upgrades recently as Morgan Stanley started covering the biotech stock with an Overweight rating. The firm believes Absci Corp (NASDAQ:ABSI) is an “economical way” to gain exposure to AI theme in the biotech and drug development industry. Morgan Stanley set a $7 price target on Absci Corp (NASDAQ:ABSI).
Over the past one year Absci shares have gained about 71%. Much of the gains came amid the AI hype as investors flocked to pile into drug companies that are using AI in any form in their operations. However, Absci is not all hype. The company has some promising deals with major companies that could bear fruit in the future. The Canadian company signed an agreement with AstraZeneca PLC (AZN) to “deliver an AI-designed antibody against an oncology target.” The agreement is worth about $247 million. It also has a collaboration agreement with Merck & Co., Inc. (MRK) involving three targets, valued at up to $710 million in upfront fees, milestone payments, research funding, and tiered royalties on any commercial sales.
During the first quarter, Absci revenue came in at just $0.9 million, compared with $1.3 million last year. R&D expenses totaled $12.2 million, while SG&A expenses totaled $8.7 million.
Absci does not have any notable clinical-stage assets at this time. Its key drug candidate is ABS-101, which targets TL1A, a member of the tumor necrosis factor family which is a well-known target for inflammatory diseases. However, analysts believe many other companies are targeting this treatment.
With an annual cash burn of $80 million, and only $160 million in near-term assets, Absci remains a speculative play for investors with a large risk appetite.
9. Best Buy Co Inc (NYSE:BBY)
Number of Hedge Fund Investors: 30
Wall Street is currently going extremely bullish on Best Buy, thanks to the AI wave that is about to bring about a new wave of consumer spending. New retail sales data shows that spending on laptops and clothes is outpacing furniture and home improvement. Analysts believe consumers are ready to buy new AI-equipped laptops, a trend that could benefit retailers like Best Buy.
DA Davidson analyst Michael Baker recently said in a note that the last replacement cycle for laptops came during the pandemic and now that four years have passed on that cycle, consumers are ready to spend on new laptops, especially amid the AI wave. The analyst has a $95 price target on Best Buy stock.
Data also supports this trend. Market research firm Canalys estimates that one in five PCs shipped in 2024 will be AI-capable, translating into 170 million AI-capable PCs. Being a seller of laptops and PCs, Best Buy would be the direct beneficiary of this trend. Recent data shows improving consumer electronics trends, led by new PC demand, with worldwide PC shipments increasing year-over-year for the first time since Q3 2021 and a 1.5% rise in Q1 2024.
Last month, UBS also upgraded the stock to Buy from Neutral, citing the consumer demand cycle.
Bank of America also upgraded Best Buy (BBY) to a Buy rating from Sell, citing improved gross margins in a strong earnings report. The price target was raised from $67 to $100 due to increased sales and margin estimates. Analyst Steven Zaccone noted positive prospects for earnings and valuation, driven by tech replacement cycles, AI innovation, and solid margin execution. Zaccone also pointed to a positive inflection in same-store sales, driven by laptop purchases, and expected growth in AI adoption, particularly during back-to-school and holiday seasons. He believes Best Buy can maintain its EBIT margin despite potential competitive pressures.
Mairs & Power Growth Fund stated the following regarding Best Buy Co., Inc. (NYSE:BBY) in its fourth quarter 2023 investor letter:
“We added two smaller positions to the portfolio in the fourth quarter as well—Piper Sandler (PIPR) and Best Buy Co., Inc. (NYSE:BBY)–both of which are Minnesota-based. We also initiated a position in Best Buy, a leading electronics retailer with more than 1,000 stores nationwide. We’ve been impressed with management’s ability to navigate a difficult retail landscape, gaining share amongst its offline competitors. The consumer electronics market is suffering from a spending hangover after the Pandemic, but we are starting to see green shoots of a recovery; in the meantime, Best Buy offers a 5% dividend.”
8. Coinbase Global Inc (NASDAQ:COIN)
Number of Hedge Fund Investors: 48
Wolfe Research earlier this month published a list of stocks that can benefit from a Trump presidency. Coinbase Global Inc (NASDAQ:COIN) was part of the list. However, Raymond James has warned that Coinbase is expected to post softer results in the second quarter when compared with the first quarter as trading volumes on its platform weakened sequentially in the face of lower token prices.
As regulators approve crypto ETFs and Bitcoin continues to gain ground, cryptocurrencies are seeing wide acceptability and moving beyond the stage when they were disregarded as something speculative. Being one of the largest crypto exchanges in the world, Coinbase Global Inc (NASDAQ:COIN) is positioned well to benefit from the growth of crypto. During the first quarter Coinbase Global Inc (NASDAQ:COIN) revenue doubled year over year to roughly $1.59 billion, driven by transactional revenue, subscription revenue and fees.
EPS estimate for Coinbase Global Inc (NASDAQ:COIN) this year is $7.24 per share, representing an astonishing 1,856.73% year-over-year growth. In contrast, the sector median growth is a mere 3.42%. However, Coinbase Global Inc (NASDAQ:COIN) valuation has been a concern for many. The stock’s forward P/E is 31. Given Wall Street’s revenue growth estimate of just 0.70% for next year and earnings growth estimate of -36%, this valuation is high. Analysts also believe the popularity of crypto ETFs and retail investors embracing trading platforms like Robinhood does not bode well for Coinbase Global Inc (NASDAQ:COIN) since investors would prefer to directly invest in crypto ETFs and currencies instead of investing in Coinbase stock.
Coinbase Global Inc (NASDAQ:COIN) is a promising play for those with a higher-risk appetite. However, for those who want to avoid the roller-coaster ride of crypto volatility, the stock might not be a good choice.
Patient Capital Opportunity Equity Strategy stated the following regarding Coinbase Global, Inc. (NASDAQ:COIN) in its first quarter 2024 investor letter:
“This quarter we benefited from our exposure in the cryptocurrency space. The approval of 11 new spot Bitcoin ETFs dramatically opened Bitcoin to new investors for the first time. Investors’ interest was material, with assets under management growing to $55B over a single quarter. Coinbase Global, Inc. (NASDAQ:COIN) was a beneficiary of these events as we believe it is building the foundation of the crypto-ecosystem. We continue to believe COIN has the potential to be the platform for crypto as it has continued to widen its moat by investing throughout the most recent crypto winter.”
7. Snowflake Inc (NYSE: SNOW)
Number of Hedge Fund Investors: 73
Jefferies analyst Brent Thill named Snowflake Inc (NYSE:SNOW) as his top AI pick for the back half of 2024 as he expects the stock to benefit from the rising demand in infrastructure and software. Thill believes companies like Snowflake will benefit as companies begin to actually install and deploy AI software in the POC (proof of concept) stage of the AI cycle.
Snowflake is a Cloud-based data warehouse offering data storage and analytics services. The company’s moat lies in its data technologies that let companies analyze and make sense of unstructured data. Amid the generative AI boom, companies are ready to spend a fortune to use huge datasets to their advantage. This would bode well for Snowflake. The company’s usage-based pricing model also gives it an edge in the market. The company expects the total addressable market for its Cloud data platform to rise to $342 billion by 2028, which is double the market size of 2023.
During the fiscal first quarter, its revenue jumped 33% year over year and the company posted a 4% non-GAAP operating margin, exceeding guidance of 3%. It was a 400 bps improvement year over year. Snowflake has posted non-GAAP profitability for five straight quarters. As of the end of the first quarter, the company had $4.5 billion in cash and no debt. The company also upped its revenue guidance and talked about the impact of AI investments in the short term during Q1 earnings call:
For Q2, we expect product revenue between $805 million and $810 million, we are increasing our FY ’25 product revenue guidance.
We now expect full year product revenue of approximately $3.3 billion, representing 24% year-over-year growth. Turning to margins. We are lowering our full year margin guidance in light of increased GPU-related costs related to our AI initiatives. We are operating in a rapidly evolving market, and we view these investments as key to unlocking additional revenue opportunities in the future. As a reminder, we have GPU related costs in both cost of revenue and R&D.
Alger Focus Equity Fund stated the following regarding Snowflake Inc. (NYSE:SNOW) in its Q1 2024 investor letter:
“Snowflake Inc. (NYSE:SNOW) is a cloud-based data warehousing company that allows organizations to store, analyze and share data in a secure. scalable and cost-effective manner. This includes the Data Cloud. an ecosystem where Snowflake customers, partners. data providers, and data consumers can break down data silos and derive value from rapidly growing data sets in a secure, governed, and compliant way. Its platform supports a range of use cases. including data warehousing, data lakes, data engineering, data science, data application development, and data sharing. While the company reported an overall healthy fiscal fourth quarter. shares detracted from performance after management lowered their fiscal 2025 forward revenue guidance below analyst estimates. Further, the company announced that CEO Frank Slootman would be retiring from the role immediately, succeeded by Sridhar Ramaswamy, the former SVP of Al who has demonstrated impressive speed in bringing new Al products and features to market.”
6. Adobe Inc (NASDAQ:ADBE)
Number of Hedge Fund Investors: 108
Earlier this month Deutsche Bank added Adobe Inc (NASDAQ:ADBE) to its Fresh Money list and gave the stock bullish comments amid AI catalysts.
Deutsche Bank believes the company’s creative cloud division is expected to grow along with generative AI products kicking in.
“We believe this creates an opportunity to see positive estimate revisions along with multiple expansion as the narrative flips to Adobe Inc (NASDAQ:ADBE) once again a gen AI beneficiary.”
The firm raised its price target on the stock to $650.
Mizuho analyst Gregg Moskowitz also said in a fresh note that the “breadth of” AI monetization of Adobe Inc (NASDAQ:ADBE) is being “underappreciated” by the market.
Adobe shares rose after the company posted a strong Q2, putting an end to skeptics’ narrative which said the company’s editing tools were under threat from the generative AI revolution. JPMorgan upgraded the stock to Overweight from Neutral after the Q2 results and upped its price target to $580 from $570.
Previously, the stock suffered as several analysts voiced their doubts about Adobe’s growth in the AI era. Melius Research recently downgraded Adobe Inc (NYSE:ADBE) stock to Hold from Buy with a $510 price target, citing broader issues the enterprise software industry is experiencing when it comes to AI. Melius analyst Ben Reitzes said these issues are similar to the ones on-premise hardware companies experienced following the rise of Cloud computing. The analyst also said that AI is making it easier for smaller companies to develop and deploy tools, increasing competition to bigger players in the industry.
Adobe Inc (NYSE:ADBE) shares have lost about 4% so far this year. The notion that the rise of generative AI tools would give a tough competition to Adobe Inc’s (NYSE:ADBE) design tools is weighing down the stock.
Adobe Inc (NYSE:ADBE) management sensed the worries among investors stemming from fears the generative AI boom would cut the demand of Adobe products. Adobe Inc’s (NYSE:ADBE) management believes the AI boom would only increase the need of its editing tools since text-to-image content cannot be used in isolation and needs editing. Here’s the management’s take on why it believes Adobe Inc (NYSE:ADBE) has no threats in the AI arms race:
“Every creator and business is focused on building their brand and engaging with their audiences through standout content. Creative Cloud remains the solution of choice for the world’s creators, whether their medium is design, photography, video, illustration or 3D. Adobe Express is inspiring millions of users of all skill levels to design more quickly and easily than ever before. In the year since we announced and released Adobe Firefly, our creative generative AI model, we have aggressively integrated this functionality into both our Creative Cloud flagship applications and more recently, Adobe Express, delighting millions of users who have generated over $6.5 billion assets to date. In addition to creating proprietary foundation models, Firefly includes a web-based interface for ideation and rapid prototyping, which has seen tremendous adoption.
We also recently introduced Firefly Services, an AI platform which enables every enterprise to embed and extend our technology into their creative, production and marketing workflows.”
Read the full earnings call transcript here.
Alger Focus Equity Fund stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q1 2024 investor letter:
“Adobe Inc. (NASDAQ:ADBE) is a diversified software company that provides document and creative software to a wide audience, including creative professionals and enterprises. Its flagship products, such as Photoshop, Acrobat, and Creative Suite, set industry standards like PDF and Flash, supporting a broad range of Adobe applications. As such, we believe Adobe is a primary beneficiary of the digitization (i.e., converting analog information into digital format) spending theme. Recently, the company announced a generative Al (Gen Al) tool called Firefly which is a family of creative GenAl models which will be incorporated into Adobe’s product suite, which can be utilized by consumers and enterprises to potentially save time and effort by automating tasks like image and text generation. We believe Adobe has the potential to leverage Al by integrating software programs into its existing products and enhancing developer Application Programming Interfaces (APIs) to facilitate Al-driven workflows. While the company delivered strong fiscal first quarter operating results, shares detracted from performance after management lowered their fiscal second quarter guidance with Al related growth acceleration being pushed out into the second half of 2024 due to difficult year-over-year pricing comparison. particularly within their creative vertical segment.”
5. Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Deepwater’s Gene Munster thinks that Alphabet Inc Class C (NASDAQ:GOOG) is going to win the “AI arms race.” While talking to CNBC, the analyst said that Google search business is “intact, no need to worry.” Munster’s thesis is based on his in-depth testing of several large language models and chatbots including Google’s Gemini. Munster also thinks other chatbots do not offer a strong imperative for users to switch from Google search as of yet.
Wedbush’s Dan Ives in a fresh note named Alphabet Inc (NASDAQ:GOOG) as one of the stocks that can benefit from the AI boom.
According to a 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 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 urges 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.
ClearBridge Dividend Strategy stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q2 2024 investor letter:
“Communication services gains in the S&P 500 were driven mainly by Alphabet Inc. (NASDAQ:GOOG) (aka Google). The company has a dominant position in internet search and video advertising, and a solid cloud services business. Alphabet’s initiation of a dividend in the quarter enabled us to take a small position. We see further meaningful revenue opportunities from AI innovations across its segments and may look to increase our holdings over time. Alphabet’s exceptional balance sheet and improving cost efficiencies further solidify its strong position and growth prospects, and we expect its dividend will grow sharply over time.
The recent addition of Alphabet and Meta reflect the benefits of our flexible dividend approach. Our active (as opposed to formulaic) approach to dividends enabled us to move quickly and buy the shares soon after each announced its dividend. Over the years, our nimble approach to dividend investing has frequently enabled us to profit from long-term investments in high-growth technology companies that many passive or formulaic dividend investors likely missed (e.g., American Tower, Mastercard, Meta, Visa).”
