In this article, we will take a detailed look at the Forget Magnificent 7: Analysts are Talking About ‘Big 10’ AI Stocks in 2024.
When the AI revolution started with the launch of ChatGPT, investors started pouring money into a handful of companies that are leading AI technology development, thanks to their industry position and unending free cash flows. Market analysts soon started pointing to the concentration of gains phenomena in the market, where just a few stocks accounted for most of the broader market gains. This tech concentration remains strong as of today, as all important AI and Cloud technologies that we see in the news are developed, acquired or marketed by mega-cap tech companies we’re all familiar with. Bank of America analyst Michael Hartnett recently said in a report that the S&P 500 has gained about 12% so far in the year, but if we remove 10 technology companies from the equation, these gains shrink to just 3.6%. Hartnett calls these companies the “AI Big Ten” group.
What about the Magnificent Seven group of stocks that kept making headlines in 2023 and early 2024? Hartnett calculated that the broader market gained just 4.9% so far this year if these seven stocks are taken out of the equation. There is a third group of stocks that most investors are unaware of: Hedge Fund Top 30. These 30 stocks include the Magnificent Seven as well as 23 other promising stocks. These 30 stocks returned 53.2% in 2023, 20.2% during the first 5 months of 2024 vs. 11% for the S&P’s large cap index. You can check out the latest list here: 31 Most Popular Stocks Among Hedge Funds.
In this article we will take a look at the Big 10 AI stocks Bank of America analyst Michael Hartnett highlighted in his report. With each stock we have mentioned the number of hedge fund investors, as of the end of the March quarter. 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. Qualcomm Inc (NASDAQ:QCOM)
Number of Hedge Fund Investors: 78
Qualcomm Inc (NASDAQ:QCOM) is fast becoming a notable AI stock in the Street. Bank of America recently counted Qualcomm among to ‘Big Ten’ AI stocks that are dominating the market. Qualcomm Inc (NASDAQ:QCOM) recently made headlines after the company revealed its AI PC plans at the Computex 2024 conference. Qualcomm Inc (NASDAQ:QCOM) is partnering with Microsoft to delivery Copilot+ PC, becoming a director competitor to Intel and AMD.
In addition to AI PCs, AI smartphones is another emerging growth catalyst for Qualcomm Inc (NASDAQ:QCOM). The company’s Snapdragon 8 Gen 3 Mobile Platform can powers smartphones to process up to 10 billion parameters of generative AI models, effectively making them intelligence personal assistants.
Despite Apple’s push to become self-reliance in chips technology, Qualcomm Inc’s (NASDAQ:QCOM) partnership with the iPhone company is strong. Qualcomm will keep supplying Apple with Snapdragon 5G Modem-RF Systems for Apple’s smartphones until at least 2026.
Data from Counterpoint Research shows global smartphone shipments were expected to increase 3% in 2024, while IDC numbers show a 7% increase in the global smartphone market in the first quarter of 2024. This broader growth in the smartphone market would also help QCOM.
Wall Street expects Qualcomm Inc’s (NASDAQ:QCOM) revenue to grow 10% in 2025 and earnings to rise by 13.10% in the year. Despite these growth catalysts, Qualcomm is trading at a forward P/E of 18.42, lower than the industry median of 23.73.
Madison Sustainable Equity Fund stated the following regarding QUALCOMM Incorporated (NASDAQ:QCOM) in its fourth quarter 2023 investor letter:
“QUALCOMM Incorporated (NASDAQ:QCOM) also reported a solid fourth fiscal quarter with better than expected results. The company guided the first quarter ahead of expectations despite headwinds from Samsung as the inventory headwinds dissipate. Qualcomm remains well positioned in the mobile handset market and should benefit as Artificial Intelligence moves to edge devices which could drive an upgrade cycle.”
9. Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Investors: 79
BofA added AMAT in its list of Big 10 AI stocks that are adding to market gains. Applied Materials, Inc. (NASDAQ:AMAT) is one of those non-fancy AI stocks that don’t get much limelight from the Wall Street as they keep churning out returns. The stock, up 47% this year so far, received an upgrade from Barclays. The investment firm expects the stock to benefit from higher spending in the semiconductor equipment industry. Barclays expects wafer fab equipment spending to hit $96.3 billion in 2024 and $106.4 billion in 2025, up from its previous estimate of $80.6 billion and $89.1 billion, respectively.
In May, Applied Materials, Inc. (NASDAQ:AMAT) posted solid Q2 results. Mizuho Securities analyst Vijay Rakesh upped his price target on the stock to $245 from $225 and kept his Buy rating. Citi analyst Atif Malik also increased his price target on the stock to $250 from $170. The analyst sees “further upside” to Applied Materials, Inc.’s (NASDAQ:AMAT) 2025 estimates.
Applied Materials, Inc.’s (NASDAQ:AMAT) moat is strong and wide. The company makes equipment used to make semiconductor chips. It has a diverse equipment portfolio that the high-growth ICAPS industry (IoT, Communications, Automotive, Power, and Sensors). Last year Applied Materials, Inc. (NASDAQ:AMAT) made a breakthrough announcement by launching Centura Sculpta, a machine that dramatically reduces the number of steps required in chips production. Applied Materials, Inc. (NASDAQ:AMAT) said chipmakers can save a whopping $250 million per 100K wafer starts per month of production capacity in costs.
Wall Street expects Applied Materials, Inc.’s (NASDAQ:AMAT) revenue to surge 11% in 2025 while earnings growth is forecasted to come in at 15.60% in the year. The stock’s forward P/E is 23.73, not much higher than the industry average of 27, when seen in the context of growth.
8. Micron Technology Inc (NASDAQ:MU)
Number of Hedge Fund Investors: 115
Wall Street is taking notice of Micron Technology Inc’s (NASDAQ:MU) ascendance in the AI industry dominance hierarchy. BofA thinks Micron Technology Inc (NASDAQ:MU) is one of the Big 10 AI stocks in 2024, having gained about a massive 62% so far this year.
UBS recently maintained a Buy rating on Micron Technology Inc (NASDA:MU) and increased its price target on the stock to $155 from $125, citing its industry checks pointing to higher prices in the DRAM and NAND memory industry. UBS said that Micron Technology Inc’s (NASDA:MU) valuation could become attractive once its gross margin peaks in the fourth quarter of 2025 . UBS expects Micron Technology Inc’s (NASDA:MU) EPS in 2025 to come in at around $17.50.
During the fiscal second quarter, out of its four segments, three segments saw a 50% growth on a YoY basis. At the consolidated level, Micron Technology Inc (NASDA:MU) saw a 58% YoY revenue growth. During fiscal Q3, Micron Technology Inc (NASDA:MU) expects revenue growth to increase to 76%. Analysts believe Micron Technology Inc (NASDA:MU) is expected to keep growing faster amid a rising demand for its chips that power Cloud and AI servers. Micron HBM3E, one of Micron Technology Inc’s (NASDA:MU) most famous AI chips, has already sold out for 2024 and most of 2025.
According to data compiled by Yahoo Finance, Wall Street expects Micron Technology Inc’s (NASDA:MU) revenue growth to total 44% in 2025, while earnings growth is expected at 750% in the next year. The stock’s forward P/E ratio is 18, which is justified if Micron Technology Inc (NASDA:MU) is able to see sustained growth in the months to come.
Sequoia Fund stated the following regarding Micron Technology, Inc. (NASDAQ:MU) in its fourth quarter 2023 investor letter:
“Exits last year included Netflix, Bank of America and Micron Technology, Inc. (NASDAQ:MU). As discussed in our Q2 shareholder letter, we exited Micron after the rationale for our investment was strained by rising geopolitical tensions, which have increased investment risks in the high-performance semiconductor industry. These risks are bearable, but we felt it prudent to reduce the portfolio’s exposure to them. We think both Bank of America and Micron were purchased at conservative prices given the facts at hand, but the facts changed and we moved on.”
7. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
Broadcom Inc. (NASDAQ:AVGO) is also among the Big 10 AI stocks highlighted by BofA’s Michael Hartnett recently.
JPMorgan in 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%.
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
AMD is one of the top AI semiconductor stocks. BofA added the stock in its Big 10 AI list as the stock has gained about 16% so far this year.
Advanced Micro Devices, Inc. (NASDAQ:AMD) shares recently slipped after Morgan Stanley’s Joseph Moore downgraded the stock to Equalweight from Overweight, saying the Street’s expectations from Advanced Micro Devices, Inc.’s (NASDAQ:AMD) AI business are “too high.” The analyst went on the say that Advanced Micro Devices, Inc. (NASDAQ:AMD) is expensive when compared to peers like NVDA and AVGO. However, the analyst retained his $176 price target on the stock.
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. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
BofA also named Alphabet Inc. (NASDAQ:GOOG) as one of the Big 10 AI stocks that are contributing to the overall market returns so far. The stock has gained about 28 so far this year.
Another latest story around Alphabet Inc Class C (NASDAQ:GOOG) making waves is Bank of America’s industry checks in the search engine market which found that Alphabet is still the market leader, with a whopping 95% share, with Bing’s search coming in at just 0.7%.
BofA’s Justin Post said Alphabet Inc’s (NASDAQ:GOOG) AI Overviews had a role to play here:
“After a consecutive eight months of decline, Google’s US Search market share increased m/m in May, which could suggest AI Overviews are aiding query growth and usage,” Post 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
Earlier this month, while highlighting the Big 10 AI stocks and their contribution to the overall market returns, BofA’s Michael Hartnett said that if we exclude NVIDIA Corp (NASDAQ:NVDA), the S&P 500’s YTD gains narrow to just 7.9%. Nvidia is indeed one of the big ten, if not the biggest, AI stock right now. Oppenheimer recently increased its price target on NVIDIA Corp (NASDAQ:NVDA) to $150 from $110 after the stock’s 10-1 split.
Barclays Tom O’Malley recently gave bullish comments on the stock, with a $145 price target and an Overweight rating. The analyst pointed to a potential $25 billion opportunity from countries building up their AI capabilities. O’Malley expects NVIDIA Corp’s (NASDAQ:NVDA) earnings at $3.62 per share in fiscal 2026, while Wall Street analysts on average have a $3.55 per share estimate for NVIDIA Corp (NASDAQ:NVDA) earnings for 2026.
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
Meta Platforms Inc (NASDAQ:META) is one of the top Big 10 AI stocks highlighted by BofA in its latest report.
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
Microsoft Corporation (NASDAQ:MSFT) shares have gained about 15% so far this year. It is one of the Big 10 AI stocks highlighted by BofA recently.
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
Amazon.com Inc. (NASDAQ:AMZN) is one of the top AI stocks and BofA’s Michael Hartnett counted the ecommerce and Cloud giant among his list of the Big 10 AI stocks.
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.
Mar Vista Strategic Growth Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its first quarter 2024 investor letter:
“Amazon.com, Inc. (NASDAQ:AMZN) is experiencing a surge in profitability, reflected in significantly higher retail profit margins. Strategic cost reductions in headcount and fulfillment have materialized into financial gains. While the unexpected pandemic-driven demand surge necessitated a rapid expansion of fulfillment infrastructure, this initially impacted operating profits. However, current unit sales growth has effectively reached equilibrium with fulfillment capacity. This balance is leading to positive adjustments to both earnings and intrinsic value estimates. Should the economic climate continue to improve, we believe Amazon’s investment potential aligns with its projected 15-20% intrinsic value growth trajectory.”
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).”
However, Amazon.com Inc (NASDAQ:AMZN) skeptics believe the stock has run too much as its valuation is high. For value-conscious investors the market is indeed teeming with other opportunities. If you are looking for an AI stock that is as promising as Amazon.com Inc (NASDAQ:AMZN) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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