We recently published a list of Coatue’s 35 Most Important AI Stocks. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against Coatue’s other most important AI stocks.
Artificial intelligence (AI) has fueled a major rally in the technology sector, driving up key market indices. Over the past year, the S&P 500, heavily influenced by tech giants, has risen by nearly 22%, while the tech-heavy NASDAQ Composite has surged over 26%. Initially, market analysts had predicted an increase in interest around growth options for 2024 due to easing inflation and potential rate cuts. However, AI has taken this expected interest and amplified it into an economy-wide wave of optimism. While tech stocks have been the primary beneficiaries, AI’s influence is expanding across industries such as manufacturing, supply chain, transportation, entertainment, and retail.
Investment in AI is growing rapidly across various sectors. A recent Goldman Sachs report estimates that global businesses will invest nearly $1 trillion in AI infrastructure over the next few years. Venture capital (VC) investments in AI startups are also on the rise. In the first half of 2024 alone, VC firms made approximately 200 AI-related deals, injecting nearly $22 billion into the sector. The average AI startup funding round now exceeds $100 million, with company valuations averaging over $1 billion. In contrast, non-AI startups typically receive around $20 million in funding and have valuations near $200 million, indicating AI’s outsized appeal to investors.
Companies that were early adopters of AI have experienced significant gains, particularly those specializing in graphics processing units (GPUs), AI chips, and generative AI technologies. The median returns of AI-linked firms in the S&P 500 stand at 20%, compared to just 2% for non-AI stocks. AI companies are also responsible for 90% of the total returns on the NASDAQ Composite Index. These gains are expected to drive earnings growth and contribute to broader economic expansion. According to Joseph Briggs, a senior global economist at Goldman Sachs, AI is projected to automate 25% of all work tasks in the next decade, increasing US productivity by 9% and boosting GDP growth by more than 6%.
Read more about these developments by accessing 10 Best AI Data Center Stocks and 10 Buzzing AI Stocks According to Goldman Sachs.
Philippe Laffont of Coatue Management argues that AI could be the start of a new “super cycle” in the tech industry. Previous cycles included the rise of personal computers in the 1980s, networking in the 1990s, wired internet in the 2000s, and mobile internet in the 2010s, leading to the cloud era. However, software and internet experts Kash Rangan and Eric Sheridan highlight a key difference: this time, companies are linking AI investments directly to revenue generation, providing a financial safety net that was absent in past cycles.
Since the launch of ChatGPT by OpenAI in early 2023, the industry’s focus has shifted from software to AI hardware and infrastructure. AI infrastructure companies have collectively added nearly $6 trillion to their market capitalization since Q1 2023. Before large-scale AI automation becomes commonplace—MIT economist Daron Acemoglu estimates this will take more than a decade—AI infrastructure is expanding into areas such as utilities, energy, internet, and industrials. Interestingly, companies in these sectors that support AI development have posted returns rivaling those of traditional AI firms.
The growing demand for AI-driven data centers is also driving investments in the energy and utilities sectors. Goldman Sachs analysts Carly Davenport and Alberto Gandolf expect AI adoption to drive a surge in electricity demand not seen in decades. However, whether AI’s growth will align with energy infrastructure investments remains uncertain due to regulatory constraints and supply chain limitations in the utilities sector. Even if necessary investments materialize, their full benefits may take years to reach AI companies.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and Beyond the Tech Giants: 35 Non-Tech AI Opportunities.
Some investors remain cautious, fearing an AI bubble similar to the dot-com crash of the early 2000s. However, current data suggests that AI valuations are far more grounded than those of the dot-com era. At the height of the dot-com bubble, software firms traded at price-to-earnings (P/E) ratios of 132x, compared to a five-year average of 37x in 1999. In contrast, in 2023, even the biggest AI stocks had P/E ratios around 39x, with a five-year average of 40x. These figures suggest that AI valuations are not overinflated, reinforcing investor confidence in AI’s long-term potential.
AI companies are increasingly targeting multi-trillion-dollar valuations, comparable to today’s largest software and internet firms. Over the past decade, tech giants have scaled their businesses to unprecedented levels, combining billions of users, hundreds of billions in revenue, and tens of billions in net income. Today, a handful of firms account for 80% of the valuation of the Fortune 500. These companies dominate industries such as smartphones, e-commerce, cloud computing, and software-as-a-service (SaaS), all of which AI is poised to disrupt. As a result, these firms are aggressively incorporating AI into their business strategies to maintain market leadership.
Some investors worry that AI firms could overshadow software companies, impacting long-term valuations. The price-to-sales (P/S) ratio for software stocks, which peaked in 2021, is now at an all-time low. Slower earnings growth has also contributed to negative sentiment in the sector. Coatue’s research shows that over the next twelve months, only 1% of SaaS companies expect 30% earnings growth, down from 30% during the SaaS boom. However, as human-machine interaction shifts towards natural language processing and generative AI, software companies that successfully integrate AI into their platforms are likely to thrive.
As inflation cools, rate hikes ease, and prospects for a soft economic landing improve, AI’s macroeconomic outlook remains strong. AI is now the primary driver of future earnings growth in the S&P 500. According to Coatue’s projections, AI-linked stocks are expected to grow at a compound annual rate of nearly 20% over the next three years, outperforming non-AI stocks by approximately 14%. Additionally, 40% of future tech sector earnings are expected to be fueled by AI advancements. All available data points to a bright future for AI investments, with its influence extending far beyond traditional tech firms. As companies continue integrating AI into their operations, productivity and economic growth are set to accelerate, making AI one of the most transformative forces in modern history.
For this article, we selected AI stocks by combing through a note on the AI industry by Coatue Management. These stocks are also popular among other hedge funds. 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).
NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 193
NVIDIA Corporation (NASDAQ:NVDA) provides graphics, computing and networking solutions. In the report for the fourth quarter of 2024, GAAP earnings per diluted share was $4.93, showing an increase of 33% from the previous quarter and up 765% from a year ago. Non-GAAP earnings per diluted share was $5.16, showing an increase of 28% from the previous quarter and up 486% from a year ago. These metrics indicate strong financial performance driven by higher revenues and improved margins, positioning the company for continued success. Also, record quarterly data center revenue was $18.4 billion, showing an increase of 27% from the third quarter, indicating heightened demand for data center products or services, possibly driven by trends like cloud computing expansion. NVIDIA Corporation (NASDAQ:NVDA) has also launched AI foundation Models for RTX AI PCs. These models offered as NVIDIA NIM microservices, are accelerated by new GeForce RTX 50 Series GPUs, which feature up to 3,352 trillion operations per second of AI performance and 32GB of VRAM.
Overall, NVDA ranks 4th on our list of Coatue’s most important AI stocks. While we acknowledge the potential of NVDA as an investment, our conviction lies in the belief that some stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
