There has been much uproar about AI stock valuations and how investors are overpaying for mega-cap tech stocks that are promising something that still lies far into the future — productivity gains, real-life AI products and AGI. But the market doesn’t seem to care what the AI skeptics and naysayers believe. There seems to be no end in sight to the AI-led gains in stocks. And analysts are expecting more. Goldman Sachs’s Scott Rubner recently said that he sees a “wall of money” heading towards the market. Rubner pointed towards the whopping $7.3 trillion sitting in money market funds and said he believes the floodgates are about to open and investors would funnel that money into stocks. According to Rubner’s model, the third quarter of 2024 is when we should expect billions ($29 billion, to be precise) to be flushed into the market.
“Stick With What’s Working”
One doesn’t need to have a crystal ball to know where all of those billions would be headed. AI is the promising theme everyone is betting on and that everyone includes experts, billionaires, money managers and long-term value investors. Tom Lee, Fundstrat Global Advisors co-founder, recently said in a program on CNBC that investors have been “hesitant” for much of the year, but they should just “stick” with “what’s working.” AI, weight loss drugs and related themes is what’s working these days, according to Lee.
Methodology
For this article we picked the top AI stocks Wall Street analysts recently upgraded or gave bullish comments about. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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10. Palantir Technologies Inc (NYSE:PLTR)
Number of Hedge Fund Investors: 45
Last month, Wedbush’s Dan Ives said the latest selloff around Palantir Technologies Inc (NYSE:PLTR) was a “golden” buying opportunity. Ives has an Outperform rating and a $35 price target on Palantir Technologies Inc (NYSE:PLTR). Palantir Technologies Inc (NYSE:PLTR) is trading at a high P/E multiple of 170, which has alarmed many. However, Palantir Technologies Inc (NYSE:PLTR) bulls believe Palantir Technologies Inc’s (NYSE:PLTR) consistent contract wins from the government and AI-related growth catalysts justify this multiple. Analysts are bullish on Palantir Technologies Inc’s (NYSE:PLTR) AI platform (AIP), which helps companies and governments in decision making based on AI technologies. In the first quarter alone, Palantir Technologies Inc (NYSE:PLTR) saw a 16% YoY increase in government contracts. US government revenue jumped 12% year over year.
Palantir Technologies Inc (NYSE:PLTR) has increased its U.S. commercial sector growth outlook to 45% from an initial estimate of 40%. Palantir Technologies Inc (NYSE:PLTR) is expected to report sales growth of 20% next year according to Wall Street estimates. The stock is trading at 54X its 2025 EPS estimate of $0.39, which is justified based on the strong growth trajectory.
Carillon Scout Mid Cap Fund stated the following regarding Palantir Technologies Inc. (NYSE:PLTR) in its fourth quarter 2023 investor letter:
“Second was another technology stock, Palantir Technologies Inc. (NYSE:PLTR), which rallied earlier in the quarter before pulling back. Sentiment remains positive on Palantir as it has successfully rolled out a new marketing effort called “boot camps” where customers can demo the company’s new artificial intelligence platform (AIP) product. These events have been popular with potential clients, and in many cases it has been reported that customers can develop an artificial intelligence use case in just a few hours. The stock rallied as some expected this successful marketing effort could translate into faster revenue growth. Palantir also landed the coveted National Health Services account in the UK, long rumored, but the delay in the award had weighed on investor sentiment.”
9. Cisco Systems Inc (NASDAQ:CSCO)
Number of Hedge Fund Investors: 58
Cisco Systems Inc (NASDAQ:CSCO) is in the news after the company launched a $1 billion investment fund that would invest in AI startups. Cisco Systems Inc (NASDAQ:CSCO) has also announced a new partnership with Nvidia to simplify the development of generative AI applications. Wall Street considers Cisco Systems Inc (NASDAQ:CSCO) a promising AI stock, thanks to Cisco Systems Inc’s (NASDAQ:CSCO) $28 billion acquisition of Splunk. Cisco Systems Inc (NASDAQ:CSCO) expects the AI switching market to exceed $10 billion in the next three years. Cisco Systems Inc (NASDAQ:CSCO) has several AI-focused products, including AI-native cybersec solution Hypershield, AI assistants and other AI infrastructure solutions.
In May, Cisco Systems Inc (NASDAQ:CSCO) reported strong fiscal Q3 results, beating EPS estimates by 7.3% and revenue by 5.50%. Cisco Systems Inc (NASDAQ:CSCO) also increased its full-year revenue guidance. Bank of America analysts led by Tal Liani said in a note that if we exclude the Splunk effect and go with ~3% FY25 revenue growth guidance, Cisco Systems Inc’s (NASDAQ:CSCO) management expects Cisco Systems Inc’s (NASDAQ:CSCO) revenue (excluding Splunk’s) to grow 5% next year, a solid improvement. Bank of America has a Buy rating and $60 price target on the stock.
Morgan Stanley analyst Meta Marshall last month praised Cisco Systems Inc’s (NASDAQ:CSCO) Q3 results, saying Cisco Systems Inc (NASDAQ:CSCO) was able to beat estimates “slightly” with better-than-expected orders. The analyst has an Overweight rating and $58 price target on Cisco Systems Inc (NASDAQ:CSCO). Marshall thinks Cisco’s 2025 earnings estimates are “achievable.”
8. Marvell Technology Inc (NASDAQ:MRVL)
Number of Hedge Fund Investors: 87
Marvell Technology Inc (NASDAQ:MRVL) is another stock JPMorgan believes could “dominate” the customer application-specific integrated circuit, or ASIC, market. Analysts at JPMorgan estimate that Marvell Technology Inc (NASDAQ:MRVL) could generate between $1.6 billion and $1.8 billion in AI revenue from ASICs and networking this year and between $2.8 billion and $3 billion next year.
Marvell Technology Inc (NASDAQ:MRVL) shares recently tumbled following mixed Q1 results. However, some analysts believe the stock could be an opportunity to buy on the dip. Oppenheimer analyst Rick Schafer maintained his outperform rating on the stock and upped his price target to $90 from $80.
Analysts believe that Marvell Technology Inc. (NASDAQ:MRVL) could be the next major AI play as Marvell Technology Inc. (NASDAQ:MRVL) begins to roll out AI-specific products like Spica™ 800G PAM4 DSP platform for optical interconnects. Marvell Technology Inc. (NASDAQ:MRVL) also sells Application-specific integrated circuits (ASICs) for data centers, which are seeing a huge boost amid the AI revolution.
According to data compiled by Yahoo Finance, average Wall Street price target for Marvell Technology Inc. (NASDAQ:MRVL) is $87.7, which represents a 14% upside potential from the current levels.
However, Marvell Technology Inc’s (NASDAQ:MRVL) negative revenue growth has alarmed many especially when peers are growing at a faster pace. In the first quarter, revenue fell 12.2% on a YoY basis. Marvell Technology Inc (NASDAQ:MRVL) has a $3 billion of net debt. In fiscal 2025, Marvell Technology Inc’s (NASDAQ:MRVL) FCF is expected to come in at $1 billion, excluding taxes and management’s stock options. While the stock’s PE ratio (TTM) is 52, it’s trading at 32X 2025 EPS estimate. This makes Marvell Technology Inc. (NASDAQ:MRVL) a stock to consider only for the long-term. In the short-term there are much better options to invest in the AI space other than Marvell Technology Inc. (NASDAQ:MRVL).
7. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
JPMorgan is a latest report said that Broadcom Inc (NASDAQ:AVGO) can “dominate” the high-end of the customer 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%.
Baron Durable Advantage Fund stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its first quarter 2024 investor letter:
“We also initiated a new position in Broadcom Inc. (NASDAQ:AVGO), a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions. Its semiconductor solutions focus on complex digital, mixed signal, and analog products across a variety of end-markets while its software products help customers plan, develop, automate, manage, and secure applications across various platforms.
Historically, Broadcom’s semiconductor business has been a market-leading franchise with high margins and market-level growth, but the emergence of AI-related demand has spurred stronger growth across its portfolio, specifically in its Networking business unit. Broadcom’s AI-related revenue has grown from less than 5% of its semiconductor business to an expected 35% in its fiscal 2024 as its industry-leading Ethernet switch silicon business and, more importantly its custom silicon solutions, primarily the TPU for Google but with two additional customers ramping as well, have grown significantly. While custom chips tend to be less versatile and flexible than GPUs, their adoption makes sense if customers have large scale workloads with algorithms that are relatively stable, as they allow hyperscale customers to save costs on both upfront capex as well as on energy consumption. Over time, we believe that custom silicon solutions will obtain a noticeable market share of internal AI workloads, with Broadcom as the main beneficiary given its 10-year history of working with its customers, leading to a higher proportion of sales related to AI and an above-market growth in the company’s semiconductor solutions business…” (Click here to read the full text)
While we acknowledge the potential of AVGO, our conviction lies in the belief that some 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 AVGO or NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
6. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Investors: 124
Earlier this month, Citi analysts said in a note that Advanced Micro Devices, Inc. (NASDAQ:AMD) is expected to take 10% of the data center GPU market. Citi analyst Christopher Danely 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.
Advanced Micro Devices, Inc. (NASDAQ:AMD)’s latest results show a spectacular increase in data center revenue, but a lackluster increase in operating income (+26%) threw water on the enthusiasm around the stock. Advanced Micro Devices, Inc. (NASDAQ:AMD) bears also say the stock’s P/E ratio of over 240 is amongst the highest in the chips industry. Surprisingly, Advanced Micro Devices, Inc.’s (NASDAQ:AMD) forward P/E ratio is about two times higher than Nvidia’s.
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 32.50% 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.”
5. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 150
The Wall Street is running out of patience with Apple Inc (NASDAQ:AAPL) amid Apple Inc’s (NASDAQ:AAPL) AI strategy that’s been so far nonexistent and lagging behind competitors. But Apple Inc (NASDAQ:AAPL) bulls believe Apple Inc (NASDAQ:AAPL) will shine through in the AI race. The market is now awaiting the WWDC event where Apple Inc (NASDAQ:AAPL) is expected to reveal its AI plans. Dan Ives of Wedbush, one of the biggest Apple Inc (NASDAQ:AAPL) bulls, recently said that WWDC is the “most important event for Apple in over a decade as the pressure to bring a generative AI stack of technology for developers and consumers is front and center.”
Ives thinks Apple Inc (NASDAQ:AAPL) will be able to create an ecosystem around its AI offerings and Apple Inc (NASDAQ:AAPL) would see a $30 to $40 per share surge because of its AI products. Ives has a $275 price target on Apple Inc (NASDAQ:AAPL) shares.
Apple Inc (NASDAQ:AAPL) is trading at 27x its 2025 EPS estimate, which is still a high multiple given Apple Inc’s (NASDAQ:AAPL) 9.60% growth estimate for 2025 and 10.50% per-annum growth expected over the next five years. But all of this could change if Apple Inc (NASDAQ:AAPL) is able to pull AI-related catalysts out of its bag. The WWDC event and the new few weeks and months would be critical for Apple Inc’s (NASDAQ:AAPL) growth trajectory.
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.
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 Inc.’s (NASDAQ:AAPL) AI potential.
RiverPark Large Growth Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its first quarter 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL): Apple shares were a top detractor in the quarter. The company’s stock was pressured by negative news items including a government antitrust case, an Apple Watch patent dispute, and slowing China iPhone sales. Ultimately the company’s fiscal 1Q24 earnings report delivered a slightly better than expected quarter, but with guidance that disappointed investors. 1Q24 revenue and gross margin were better than feared, buoyed by stronger than expected worldwide iPhone sales which grew 6% despite a slight decline in China iPhone sales. Services revenue in the quarter was as expected and signaled the third quarter in a row of accelerating growth. Gross margins were also stronger than expected at 45.9%, the highest level in more than a decade. Guidance of $90 billion of revenue for 2Q24 was light however, due to weaker than expected iPhone sales in the current period and year-over-year declines in other hardware products facing difficult year-over year comps.
Although near-term trends are a bit muted, Apple is carrying lean inventory into an iPhone refresh cycle later this year. With an installed base of 2.2 billion active devices and significant growth of the company’s recurring revenue Services segment, we believe that Apple remains one of the most innovative, best positioned and most profitable companies in the mobile technology industry.”
4. Alphabet Inc Class C (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Alphabet Inc Class C (NASDAQ:GOOG) is apparently in a no-holds-barred fight against competitors in the AI race that according to many threatened the bread and butter of Alphabet Inc Class C (NASDAQ:GOOG): its search business. However, many analysts believe Alphabet Inc Class C (NASDAQ:GOOG) is making a big turn and will continue to grow. Alex Kantrowitz, Big Technology founder, while talking to CNBC last month, said that the present for Alphabet Inc Class C (NASDAQ:GOOG) is looking “real good” amid revenue growth, leadership’s harsh stance against those “making trouble” inside Alphabet Inc Class C (NASDAQ:GOOG), dividends and buybacks.
Latest data analyzed by Bank of America shows that across all devices, Google’s market search in search actually gained half a percentage point in May on a MoM basis. BofA analyst Justin Post said this shows Alphabet Inc Class C’s (NASDAQ:GOOG) AI Overviews are “aiding query growth and usage.”
Alphabet Inc Class C (NASDAQ:GOOG) bulls believe Alphabet Inc Class C (NASDAQ:GOOG) is just getting started with AI product launches. Alphabet Inc Class C (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 integrated with other Alphabet Inc Class C (NASDAQ:GOOG) apps. Alphabet Inc Class C’s (NASDAQ:GOOG) goal is to urge users to sign up for ‘Google One AI Premium’ plan, which has a $19.99 price tag. Analysts also believe Alphabet Inc Class C (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 Class C’s (NASDAQ:GOOG) net income in the period came in at $23.66 billion, up 57%, or $1.89 per share.
Alphabet Inc Class C (NASDAQ:GOOG) bulls believe the market is not incorporating Alphabet Inc Class C’s (NASDAQ:GOOG) growth in Cloud, Other Bets, Video and other high growth initiatives. The stock is trading 20x Alphabet’s 2025 EPS estimate of $8.57. This multiple makes the stock look attractively valued since the Wall Street expects Alphabet Inc Class C (NASDAQ:GOOG) earnings to grow by 13.40% in 2025 and by 19% over the next 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.”
3. NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 186
NVIDIA Corp (NASDAQ:NVDA) is getting several bullish calls from the Wall Street lately. Bank of America recently added NVIDIA Corp (NASDAQ:NVDA) shares to its US 1 List. The list includes BofA’s best investment ideas consisting of buy-rated stocks trading in the US. NVIDIA Corp’s (NASDAQ:NVDA) latest product announcements and its plans revealed at Computex show that NVIDIA Corp (NASDAQ:NVDA) has much more in its arsenal to power its growth engine. Analysts believe NVIDIA Corp’s (NASDAQ:NVDA) shift to new AI architecture known as Rubin (R100) and 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.”
2. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 246
Raymond James recently upgraded Meta Platforms Inc (NASDAQ:META) shares citing Meta Platforms Inc’s (NASDAQ:META) generative AI ambitions. The firm’s analyst Josh Beck increased his price target on the stock to $550 from $525. 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 Platforms Inc’s (NASDAQ:META) 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.”
1. Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 293
Microsoft Corp (NASDAQ:MSFT) is strongly positioned to benefit from the AI revolution sweeping across both software and hardware industries. The stock has a new growth catalyst in the form of AI PCs. Piper Sandler analysts Brent Bracelin, Hannah Rudoff and J.R. Herrera recently said in a note that Copilot Plus PCs could “spark a long-anticipated PC upgrade cycle.” They have a $465 price target with an Overweight rating on the stock.
During the fiscal third quarter, Microsoft Corp’s (NASDAQ:MSFT) revenue jumped 17% year over year to $61.85 billion, while its adjusted EPS saw growth of 20%. Microsoft Corp’s (NASDAQ:MSFT) Intelligent Cloud revenue growth came in at 21% on a YoY basis. Microsoft Corp’s (NASDAQ:MSFT) Cloud market share also grew to 25%, and Microsoft Corp (NASDAQ:MSFT) is slowly but surely catching up to Amazon, which has about 31% market share. 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. Based on the growth catalysts mentioned above, 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.”
If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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