In this article, we will take a detailed look at the Top 10 AI Stocks to Watch Right Now.
Tom Hancock, GMO U.S. quality ETF portfolio manager, said in a latest program on CNBC that the NASDAQ has become “risky” bet amid a lot of volatility.
“It’s become not really an index; it’s become a single bet. So it it’s a very risky thing to invest in. It’s not what I think you would want from a sort of diversified investor. It’s probably going to give you more volatile returns next year, and I’d a little bit worry that the AI rally has extended itself. So uh those may be uncomfortably volatile returns.”
Hancock said investors should also pay attention to some of the “old economy” stocks. He thinks AI stocks have become a “hype trade” and any “hiccup” in the economy could result in these stocks crashing. He also urged investors to look for stocks outside the US.
Hancock believes AI gains are now set to broaden out to smaller companies that have not received a lot of attention so far.
READ ALSO 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In
For this article we picked 10 AI stocks currently trending based on latest news. 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. Analog Devices Inc (NASDAQ:ADI)
Number of Hedge Fund Investors: 63
J.P. Morgan has released its latest forecast for the semiconductor industry in 2025. The firm sees significant potential in the application-specific integrated circuit (ASIC) market, largely driven by the rapid growth of artificial intelligence. The research firm highlighted that companies involved in AI compute, networking, and storage benefited in 2024 due to strong infrastructure development, resulting in notable share price outperformance and positive earnings revisions.
Analog Devices Inc (NASDAQ:ADI) is one of JP Morgan’s favorite chip stocks for 2025 as it believes the company is “leveraged to AI and accelerated computing.”
Carillon Eagle Growth & Income Fund stated the following regarding Analog Devices, Inc. (NASDAQ:ADI) in its Q2 2024 investor letter:
“Analog Devices, Inc. (NASDAQ:ADI) rebounded as management teams at several semiconductor companies in the analog space called the bottom, seeing improved conditions ahead. The analog semiconductor industry is a very cyclical business that has underperformed the broader semiconductor industry for several years.”
9. Marvell Technology Inc (NASDAQ:MRVL)
Number of Hedge Fund Investors: 70
J.P. Morgan has released its latest forecast for the semiconductor industry in 2025. The firm sees significant potential in the application-specific integrated circuit (ASIC) market, largely driven by the rapid growth of artificial intelligence. The research firm highlighted that companies involved in AI compute, networking, and storage benefited in 2024 due to strong infrastructure development, resulting in notable share price outperformance and positive earnings revisions.
Marvell Technology Inc (NASDAQ:MRVL) is one of JP Morgan’s favorite chip stocks for 2025 as it believes the company is “leveraged to AI and accelerated computing.”
Marvell Tech Inc (NASDAQ:MRVL) is rapidly positioning itself as an AI-first company, with its custom silicon business accounting for 73% of Q3 revenues, up from 39% during the same period last year. Marvell has a five-year agreement with Amazon (AMZN) AWS, helping Amazon design its Trainium and Inferentia ASICs, and providing a range of optical interconnect products.
Marvell Tech Inc (NASDAQ:MRVL) is now focusing on the AI opportunity, as evidenced by the recent restructuring charges, and is progressing through the design phase of its 2nm platform.
Artisan Mid Cap Fund stated the following regarding Marvell Technology, Inc. (NASDAQ:MRVL) in its Q2 2024 investor letter:
“During the quarter, we initiated new GardenSM positions in CCC Intelligent Solutions, Marvell Technology, Inc. (NASDAQ:MRVL) and Insmed. Marvell Technology is a semiconductor company offering networking, secure data processing and storage solutions to customers worldwide. We believe Marvell has among the broadest range of intellectual property in technological areas (e.g., high-bandwidth data switching and storage applications) that position it well for the growing requirements of data centers, wireless networks and autos. Several of the company’s product lines (e.g., custom silicon, optical connectivity and switching) are benefiting from the growth of AI data centers. And we believe a significant opportunity exists for the company to help design and manufacture cost-effective custom data center chips that would help cloud providers reduce their reliance on expensive graphics processing units (GPUs). Furthermore, like many other semiconductor companies, a portion of its business may be poised for a cyclical recovery after the industry’s recent inventory correction.”
8. Tesla Inc (NASDAQ:TSLA)
Number of Hedge Fund Investors: 99
Dan Crowley from Nightview Capital explained his bull case thesis for Tesla during a program on Schwab Network:
“I mean, you know, the next wave of growth that we’re seeing in Tesla Inc (NASDAQ:TSLA) are in the multi-trillion dollar adjustable market. So that’s autonomy and humanoid robots. And ultimately, those are AI products. I believe that the market itself is doing a bit of a repricing, but you know, ultimately we’re talking about the future of transportation here. And when we look out, ultimately, we believe the dominant automotive platform will be EVs paired with autonomy. The legacy OEMs are either cutting or removing both their EV and autonomy programs. So Tesla is in a basically a one-on-one position to capture that market if things proceed as we expect.
Again, the energy business is growing 50% a year; it’s still a nascent business. So from our perspective, we’re still in very early innings here, and this is a play that we see compounding out throughout the decade.”
Looking beyond the recent spike in Tesla shares amid Donald Trump’s victory, Tesla’s fundamentals are challenged. How? Tesla Inc’s (NASDAQ:TSLA) key robotaxi event was short on details. Notably absent was the discussion of a “more affordable” model that Musk had previously mentioned to boost confidence in Tesla’s vehicle sales growth outlook.
What about the $30,000 price tag claim?
Musk has indicated that the Cybercab will have a production cost of approximately $30,000. Operating within the robotaxi fleet is projected to cost around $0.20 per mile. With a production cost of $30,000, the retail price of the Cybercab is likely to exceed this figure. For instance, if the Cybercab is priced at $30,000 per unit, that translates to $15,000 per seat. In contrast, the average price per passenger seat in Tesla Inc (NASDAQ:TSLA)’s most affordable long-range RWD Model 3—factoring in full self-driving (FSD) licensing—is under $10,000 ($29,990 post-incentive vehicle price plus $8,000 for the FSD license, divided by four passenger seats). Regarding operational costs, while the Cybercab is expected to cost $0.20 per mile, charging the Model 3 is estimated at under $0.10 per mile, leaving a significant margin to cover maintenance and downtime.
There is a lot of hype around Tesla Inc (NASDAQ:TSLA) robo taxis but many believe they will not be enough to fix the company’s long-term challenges.
What are these challenges?
Tesla Inc’s (NASDAQ:TSLA) product lineup is showing signs of stagnation, with over 95% of sales still coming from the Model 3 and Model Y. Meanwhile, competitors are rolling out more advanced models. Even Rivian’s CEO suggested Tesla Inc (NASDAQ:TSLA) could be nearing market saturation for these models. According to Reuters, Tesla’s market share in Europe is slipping as legacy automakers like BMW post stronger sales. Chinese competitor BYD is also gaining ground in Europe, despite talk of tariffs.
Polen Focus Growth Strategy stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its Q3 2024 investor letter:
“The largest relative detractors during the quarter were Apple, Airbnb, and Tesla (not owned). We’ve spoken at length about our rationale for not owning Tesla, Inc. (NASDAQ:TSLA). In short, the market seems to be pricing in a lot of positive optionality for this company in the near-to-intermediate term (and particularly a fully autonomous fleet of electric vehicles in the medium term). What exists today is an automobile manufacturer limited to the higher-income segment that is increasingly challenged to sell vehicles when interest rates are not zero. We continue to question the company’s long-term growth profile and governance.”
7. Advanced Micro Devices Inc (NASDAQ:AMD)
Number of Hedge Fund Investors: 107
In late October, while talking about AMD’s Q3 results on CNBC, Stacy Rasgon, Bernstein Research senior analyst, explained the key issues haunting the company. The analyst said that Advanced Micro Devices Inc (NASDAQ:AMD) product launches are behind Nvidia’s and the stock fell after its latest quarterly results because investors were more interested in AI numbers and guidance.
“You have to be a little careful with these sort of first-party benchmarks, but they believe that they will compete well versus a subset of Nvidia’s parts. But the issue is those parts that they’re competing at with Nvidia are already here, right? Whereas we’re waiting, you know, I don’t know, 6, 9, 12 months for the relevant A and B parts. By then, Nvidia will have their next-generation stuff. And if you sort of look on a timeline, the relative dates of introduction of competing parts, Nvidia’s still got their parts in the market at least a year in advance in many cases. Couple that with the other areas where Nvidia is strong around software and services, hardware and systems, and ecosystem—these are things that AMD is trying their best to construct, but it’s very difficult. So I don’t really see the moat around Nvidia’s parts flagging.
Look, it’s very clear from these results, again I’ve said this before, I don’t want to knock AMD in the sense that you know, like the AI business they have was zero a year ago. So, I mean, it’s growing off of that. But I can clearly see where the dollars are really flowing in the space. It’s not really Advanced Micro Devices Inc (NASDAQ:AMD). It clearly is Nvidia.”
Advanced Micro Devices (NASDAQ:AMD) bulls believe the market should stop comparing the company’s chips with Nvidia and focus on its data-center growth and its competitive edge over other players like Intel. Advanced Micro Devices (NASDAQ:AMD)’s strong growth in the data center segment is indeed impressive, driven by Instinct GPU shipments and strong sales of EPYC CPUs. Advanced Micro Devices (NASDAQ:AMD) will continue to benefit from organic growth catalysts in this segment despite the competition from Nvidia. According to Goldman Sachs Research, global data center demand could surge by 160% by 2030. In the U.S., data centers are projected to use 8% of total power by 2030, up from 3% in 2022. McKinsey estimates that adding the required U.S. capacity will need over $500 billion in infrastructure investment by the decade’s end.
Advanced Micro Devices (NASDAQ:AMD)’s forward-adjusted PEG ratio is about 40% lower than the median for the tech sector (XLK).
6. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 128
Nancy Tengler from Laffer Tengler Investments said in a recent program on Schwab Network that Broadcom is the “poor man’s Nvidia” and called the stock one of her best ideas. Tengler said the guidance given by Broadcom Inc (NASDAQ:AVGO) CEO Hock Tan was “unexpected” and “explosive” and his “enthusiasm” drove the stock price.
Broadcom Inc (NASDAQ:AVGO) continues to be a leader in the AI ASCI and networking chips market. Broadcom Inc (NASDAQ:AVGO) has 3nm AI ASIC chip deals with Alphabet and Meta in addition to many other tech giants aiming massive spending for AI hyperscaling.
However, the stock could face the impact of what Nvidia is facing today: too high expectations.
In the latest quarterly results, Broadcom Inc (NASDAQ:AVGO) revenue was largely in line with estimates. The company has narrowly exceeded revenue expectations by less than 5% in most cases. Some analysts suggest Broadcom’s growth rates will moderate to below 20% CAGR starting the first quarter of 2025. In fiscal Q4, it was +50% topline growth. The market won’t be kind to the stock when the revenue growth rate slows. Broadcom has about $58 billion in net debt, which is relatively high.
Columbia Threadneedle Global Technology Growth Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q3 2024 investor letter:
“Similar to the earnings results for Nvidia, shares of Broadcom Inc. (NASDAQ:AVGO) initially sold off after the company reported solid earnings that fell light of elevated market expectations, but the stock did recover from its drawdown in the matter of a few weeks. With an enticing combination of custom chip offerings as well as networking assets, Broadcom remains one of the best positioned companies as part of the AI revolution. Broadcom outlined a path to derive a majority of its revenue from the AI end market within a couple of years, and the non-AI part of the business has stabilized after a deep correction. The company’s dominant market position in its end markets, along with durable growth, strong margins and best-in-class capital allocation, presents an opportunity to compound capital over time.”
5. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 158
Investment firm J.P. Morgan recently said that the latest Wave7 Research survey indicates Apple’s (NASDAQ:AAPL) iPhone 16 is lagging in market share compared to the previous cycle, potentially due to limited awareness of Apple Intelligence.
“Recent surveys from Wave7 Research into US sales trends across various carriers in Oct/Nov-24 highlight that average share for iPhone 16 cycle continues to track lower y/y (relative to share for iPhone 15 in the same period) despite better than seasonal trends in the latest month of survey data,” J.P. Morgan analyst Samik Chatterjee wrote in a note to clients. “The survey highlights that the lower momentum, reflected in the lower market share y/y, is likely led by the (still) lower consumer awareness for Apple Inc (NASDAQ:AAPL) Intelligence, despite expectations for the feature set to be a key driver for an upgrade cycle.”
Chatterjee maintains an Overweight rating on Apple shares.
Apple Inc (NASDAQ:AAPL) has been seeing a long-term decline in mobile carrier upgrade rates, especially postpaid, for several years. This suggests that people are holding onto their devices longer, likely due to economic factors, satisfaction with current technology, or a lack of exciting new features in recent models.
In the latest earnings call, Apple Inc (NASDAQ:AAPL) CEO Tim Cook highlighted new features for the iPhone, such as a more comfortable watch band and sleep apnea detection, but none appeared to be major demand drivers for new customers.
Parnassus Growth Equity Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) shares rose during the quarter, making our underweight position a relative detractor. Investors reacted positively to the new iPhone 16 lineup and its advanced features, including generative artificial intelligence, greater durability and increased processing power.”
4. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
Jessica Inskip, Stockbrokers.com director of investor research, explained in a latest program on CNBC why she believes Alphabet is on a bullish trajectory based on technical and fundamental analyses:
“First and foremost, Alphabet showed up on every single one of my technical scans that I ran on a weekly basis, but it’s all about AI agents. We’ve had a lot of excitement about this hyper computer and Gemini 2.0 that came out last week, but TPUs, those tensor processing units, are what actually fuel and train large language models. It accelerates those large language models, so if we have an acceleration that has better performance—four times more performance, 62% more energy efficient—that actually plays into those AI agents and enterprise solutions and positions Gole or Alphabet to actually compete with Azure and AWS. As we have AI agents like Salesforce starting to come to life, I think it’s a key theme we’re seeing in 2025.”
Based on technical analysis, Inskip said Alphabet is “primed for a breakout” at the current level of $191.
The market has been ignoring Alphabet Inc (NASDAQ:GOOGL)’s key secondary businesses and the stock remains undervalued despite concerns around AI search and regulatory onslaught.
Alphabet Inc (NASDAQ:GOOGL)’s secondary ventures in AI, autonomous driving, and other areas are making solid progress, especially in the Waymo robotaxi segment. Currently, Alphabet Inc (NASDAQ:GOOGL)’s stock trades below 20 times forward earnings, offering potential upside as EPS and other financial metrics strengthen in coming years. For next year, the consensus EPS estimate sits around $9. However, Alphabet Inc (NASDAQ:GOOGL) has consistently beaten projections, delivering $7.54 in trailing twelve-month EPS compared to the expected $6.79—a roughly 11% outperformance.
With the 2025 EPS forecast at around $9, Alphabet (NASDAQ:GOOGL) could realistically achieve earnings closer to $10 if it maintains its historical outperformance rate. At a projected $10 EPS, Google’s forward P/E multiple would be approximately 17, a relatively low valuation for a diversified market leader.
What are the key drivers for Alphabet (NASDAQ:GOOGL)?
Alphabet Inc (NASDAQ:GOOGL) remains on track to reach a $100 billion revenue run rate from YouTube Ads and Google Cloud by the end of 2024. In its autonomous driving division, Waymo has shown notable progress, with paid autonomous rides growing 200% quarter-over-quarter to 150,000 weekly rides as of late October, thanks to a fleet of 700 vehicles in service since August.
This growth is significant: Waymo vehicles now average about 30.6 autonomous rides per day—substantially higher than Uber’s average of 4.18 rides per driver daily, based on Uber’s 31 million daily trips and 7.4 million drivers last quarter. This performance underscores Waymo’s competitive edge in autonomous ride volume compared to traditional ride-hailing.
In the third quarter, Alphabet Inc (NASDAQ:GOOGL)’s Search & Other segment saw a 12.2% year-over-year revenue increase, rising from $44.03 billion to $49.39 billion. YouTube advertising also performed well, with revenue up 12.2% to $8.92 billion from $7.95 billion. Meanwhile, Alphabet Inc (NASDAQ:GOOGL)’s subscriptions, platforms, and devices revenue grew even more sharply, surging 27.8% from $8.34 billion to $10.66 billion.
Google Cloud has been expanding steadily, with revenue climbing from $13.06 billion in 2020 to $33.09 billion in 2023. Notably, Google Cloud turned profitable for the first time in 2023, posting $1.72 billion in operating profit—a significant improvement from a $5.61 billion loss in 2020. This segment’s performance continues to strengthen, with the latest quarterly revenue reaching $11.35 billion, up 35% from $8.41 billion in the same period last year.
RiverPark Large Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG): Google was our top detractor in the third quarter despite reporting second quarter results that were generally in line with expectations. The company reported slightly better revenue growth in Search, which grew 14% and continues to be resilient in the face of AI challengers, and Google Cloud, which grew 29% in the quarter. Service operating income margins of 40% and Cloud operating income margins of 11% were also both ahead of investors’ expectations as management’s cost-efficiency efforts drove operating leverage. YouTube revenue growth was slightly below expectations (+13% v. +16%) driven by tougher year-over-year comparisons and some general weakness in the Brand Advertising vertical. Finally, Cap Ex in the quarter of $13.2 billion was more than expected and likely the driver of the weakness in the stock as investors grapple with how much infrastructure investment will be required to achieve Google’s AI goals.
With its high margin business model (44% EBITDA margins last quarter), continued strength across its core Search and YouTube franchises, and continued growth and expanding profitability in its still relatively small Cloud business, we continue to view Alphabet as among the best-positioned secular growth franchises in the market. Additionally, GOOG shares trade at a compelling 19.5x the Street’s 2025 EPS estimate, a discount to the Russell 1000 Growth Index.”
3. NVIDIA Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 193
Nancy Tengler from Laffer Tengler Investments said while talking to Schwab Network in a latest program that the latest pullback in NVIDIA Corp (NASDAQ:NVDA) is a good chance to pile into the stock as she believes it will rally again:
“If you look at Nvidia’s backlog, uh if you just kind of pay attention to the anecdote like the one that Larry Ellison uh shared where he and Elon were at dinner with with Jen and just kept saying, please take more of our money, um I think if you pay attention to who’s spending and how much they’re spending that the stock will rally again.”
The analyst said she is adding to her NVIDIA Corp (NASDAQ:NVDA) position on the latest pullback:
“There’s plenty of room I think you know recalibration is never a bad thing and it gives some you know those who aren’t in the stock a chance to get in and those of us who own it we just actually added to our position uh I think it was last week or the week before.”
Simply beating earnings estimates is not enough for NVIDIA Corporation (NASDAQ:NVDA) anymore, and the impact of high expectations will continue to weigh on the stock as growth cools.
Nvidia’s forward P/E ratio for the fiscal year ending January 2026 is around 31. An EPS surprise of 8.5% was not able to help the stock. A similar trend occurred following the second-quarter earnings after a 5.6% EPS surprise. It’s difficult to see Nvidia maintaining a mid-70s gross margin by the end of 2026. Over the last two quarters, Nvidia has already reported a drop in its gross margin from 78% to 74.5%.
Then there’s competition. Amazon (AMZN) recently disclosed its Trainium 3 chip, which is set to be released by the end of 2025. The chip is expected to be twice as fast with 40% more power efficiency than the previous generation, manufactured on TSMC’s (TSM) cutting-edge N3 technology. Reportedly, technology giant Apple (AAPL) will be a consumer of Amazon’s new silicon.
Manole Capital Management stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“As of this publication, Nvidia is up roughly 150% year-to-date. NVIDIA Corporation (NASDAQ:NVDA) was the largest gainer in the S&P 500 last year and has more than tripled in value over the last year. It hit an eye-opening market capitalization of $3 trillion in June, less than four months after it eclipsed the $2 trillion mark. Enthusiasm for everything AI-related, especially for the primary chip maker whose products are essential to powering AI technology, continues to fuel the market. Last quarter, and for the fifth consecutive quarter, Nvidia reported sales and profits that blew past Wall Street expectations. The stock rose +37% in the second quarter alone.”
2. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 235
Morgan Stanley recently named its top picks for the advertising sector and released a similar list for media and entertainment stocks heading into 2025.
Morgan Stanley projects U.S. advertising to grow around 6.1% in 2025, following a challenging comparison to 2024, which includes the U.S. presidential election and Summer Olympics.
Despite this tough comparison, the firm expects strong growth in U.S. ad spending, driven by performance-oriented spending at the bottom of the funnel. Meta Platforms Inc (NASDAQ:META) is one of the top picks of the firm in this category:
“Meta Platforms Inc (NASDAQ:META) is well positioned given its long pipeline of GPU-enabled products, including improvements in AI-driven feed and video recommendations, new ranking model architecture capable of learning more effectively from larger data sets, and incremental diffusion model capabilities.”
Meta Platforms (NASDAQ:META) is driving usage and ads revenue by improving its algorithms and user experience thanks to AI. Meta also reported strong adoption of its Llama AI model, attracting over 500 million monthly active users across its platforms. This progress positions Meta well for robust profitability in the next two years as it scales its AI infrastructure.
Meta Platforms (NASDAQ:META)’s advancements in Reels and WhatsApp are helping manage CapEx growth as the company strives to stay competitive in AI.
Meta Platforms (NASDAQ:META)’s clear monetization strategy for its generative AI, especially with Llama3, makes it a strong contender against rivals like OpenAI’s ChatGPT. Meta Platforms (NASDAQ:META)’s substantial user base of 3.3 billion provides a data and distribution edge that could capture a significant share of the GenAI market. Although short-term investors may be concerned about Meta Platforms (NASDAQ:META)’s increased AI spending, its forward P/E ratio of 24x, based on FY 2025 EPS estimates of $24.62, makes it the second-most affordable big tech stock, after Google, within its peer group (Apple, Amazon, Microsoft, and Google).
RiverPark Large Growth Fund stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q3 2024 investor letter:
“Meta Platforms, Inc. (NASDAQ:META): Meta was our best performer in the third quarter after reporting a strong second quarter, including revenue of $39 billion (+22% y/y) and EPS of $5.16 (+73% y/y), both ahead of consensus expectations. Better than expected advertising revenue was driven by strength in key verticals including E-Commerce, Gaming and Entertainment, and Media. The company gave revenue guidance for Q3 that was ahead of investor expectations, driven by continued growth from Reels and Messaging (WhatsApp US users reached 100m+).
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 this year’s 62% stock price appreciation, META shares trade at 23.5x Wall Street’s consensus estimates for 2025 EPS, estimates that we think could prove to be too low.”
1. Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Investors: 286
Dan Crowley from Nightview Capital explained in a latest program on Schwab Network his “three pillars” for Amazon’s future stock price growth:
“We see kind of three pillars for kind of the next leg up in the Amazon.com Inc (NASDAQ:AMZN)
Equity. It’s been trading kind of sideways for a long period of time. I think two years ago, the retail valuation was left for dead and people only thought AWS could drive it going forward. We’ve seen a right-sizing of that business after COVID, and again, we see the possibility for real-world AI to drive earnings expansion there.
And then we’ve been incredibly heartened by the progress that we’ve seen from AWS on the AI side. And again, this is both from on-premise and the AI transition, something we see lasting throughout the decade. So there’s kind of three pillars and a lot under one hood.”
Amazon.com Inc (NASDAQ:AMZN) threw it out of the park with its latest quarterly results amid strong Cloud growth. Amazon Web Services has generated $27.5 billion in revenue, marking a 19% year-over-year increase. The segment’s operating income is expanding at nearly 2.5 times the rate of its revenue growth, boosting Amazon.com Inc (NASDAQ:AMZN)’s overall operating income. At this pace, AWS is on track to deliver $110 billion in annualized revenue. If it maintains its ~20% growth rate, AWS could reach $125-130 billion in revenue in FY 2025.
For the ongoing quarter, Amazon.com Inc (NASDAQ:AMZN) expects revenue between $181.5 billion and $188.5 billion, implying growth of up to 11%. Amazon.com Inc (NASDAQ:AMZN)’s stock currently trades at a forward P/E of 32.9, higher than the big tech average of 25.5. If Amazon.com Inc (NASDAQ:AMZN) grows its earnings per share (EPS) by an average of 25% annually over the next three years, it could achieve an EPS of around $9.25 by FY 2027 (up from an estimated $4.74 in FY 2024). Applying a 35x P/E ratio in line with Amazon.com Inc’s (NASDAQ:AMZN) historical average suggests a fair stock value of over $300. The primary catalyst for this target would be AWS’s robust operating income growth.
Qualivian Investment Partners stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“Amazon.com, Inc. (NASDAQ:AMZN): Amazon’s Q2 2024 results missed consensus revenue expectations slightly while beating EPS expectations nicely. Revenue grew 10.0%, including continued reacceleration in AWS (Amazon Web Services) which grew 19%; however, North American and International ecommerce revenue growth both showed slight deceleration in their growth rates from prior quarters. Advertising revenues grew 20%, which decelerated a bit from prior quarters as well.
Encouragingly, the company continued its streak of delivering impressive cost efficiencies in Q2 with operating margins jumping 420 bps vs. Q2 2023. Q3 2024 guidance was also a bit lower than consensus expectations sparking some short-term concerns about the strength of the consumer. We remain comfortable with our long-term outlook for Amazon’s ecommerce and AWS businesses, and expect they have new avenues of growth to exploit in scaling their advertising and generative AI business in the years ahead. However, we recognize that there is trepidation about the level of capex spending required to scale their generative AI business.”
While we acknowledge the potential of Amazon.com Inc (NASDAQ:AMZN), our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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