In this article, we will take a detailed look at the Top 10 Trending AI Stocks in Q4.
As LLMs continue to hog data from the open internet for training, publishers are growing concerned about their intellectual property and compensation. In a latest development, The New York Times issued a cease and desist letter to Perplexity to stop using its data for training without permission.
Gene Munster of Deepwater Asset Management, while talking about this news on CNBC, said that these developments could prove “horrendous” for LLMs in the short term.
“The short-term economics for these large language models is horrendous, and so, I think it changes from bad to worse in the short term. I just want to put some quick context around those numbers. Right now, OpenAI pays NewsCorp about $50 million. They’re going to do about $4 billion in revenue this year and $11 billion next year, so, I mean, it’s measurable.”
However, Munster thinks in the long term, these licensing deals would not impact major LLM companies negatively given the ROI they’d be enjoying.
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The analyst also made a prediction about Perplexity. He believes the company would be acquired because it’s competing with a lot of “big guns.” He quoted Oracle’s Larry Ellison who said that it takes about $100 billion to be a “proprietary” large language model.
“So, you look at the $6 billion at OpenAI, and you need to be raising in chunks of billions, not millions. Understand that it’s a big raise for a private company that’s moving quickly, but they’re going to get acquired. They’re just up against too many other big guns here to try to get to those coveted four or five spots of the LLM landscape.”
For this article we picked 10 AI stocks trending based on latest news. With each company we have mentioned its hedge fund sentiment. 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. Palo Alto Networks Inc (NASDAQ:PANW)
Number of Hedge Fund Investors: 66
KeyBanc’s third-quarter 2024 survey of value-added resellers (VARs) has noted a rise in IT budget expectations.
“For 2024, IT budgets saw a slight growth in expectations, but the bigger shift was in 2025, where budgets are now expected to grow by 4.4%, up from 3.2% just 90 days ago,” said KeyBanc analysts, led by Jackson Ader, in a detailed report to investors.
“Today, 37% of VARs expect IT budgets to bounce back in early 2025,” Ader said. “That’s a rise from last quarter, and the fact that it starts soon gives more clarity than before.”
The upcoming U.S. presidential election caused 26% of those surveyed to hold off on finalizing their 2025 IT budgets until the election results are in.
Another 46% mentioned that spending on artificial intelligence is impacting other areas of IT budgets, with AI and generative AI likely pulling funds away from front office, back office, and security.
Despite this, security budgets are still expected to grow by 14.4% in 2025, which is good news for companies like Palo Alto Networks Inc (NASDAQ:PANW), CyberArk, and SentinelOne (NYSE: S).
The VAR survey came after KeyBanc’s small to medium business IT survey from Q3, published on October 1. SMB respondents also expect IT spending to rise by 4.4% in 2025, compared to 1.9% growth in 2024.
Based on this survey, the firm raised its price target on Palo Alto Networks Inc (NASDAQ:PANW) to $435 from $400.
Parnassus Growth Equity Fund stated the following regarding Palo Alto Networks, Inc. (NASDAQ:PANW) in its Q2 2024 investor letter:
“Palo Alto Networks, Inc. (NASDAQ:PANW) has been a profitable position for the portfolio. Given its elevated valuation, we decided to sell it to fund the purchase of Workday, where we see greater opportunity and a clearer story of margin expansion potential.”
9. ServiceNow Inc (NYSE:NOW)
Number of Hedge Fund Investors: 97
UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.
“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.
The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.
ServiceNow Inc (NYSE:NOW) was among these stocks in the Enabling Tech category.
According to UBS, revenue for enabling tech could rise to $1.2T by 2025, or ~15% CAGR from FY20–25.
Lakehouse Global Growth Fund stated the following regarding ServiceNow, Inc. (NYSE:NOW) in its April 2024 investor letter:
“US-based software company,ServiceNow, Inc. (NYSE:NOW), provided another strong result, continuing its long and consistent track record of 20%-plus revenue growth combined with healthy profitability. Subscription revenues grew 25% year-on-year to $2.5 billion and free cash flow grew 47% year-on-year to $1.2 billion. The company’s core operating metrics were also impressive with remaining performance obligations growing 26% year-on-year to $17.7 billion (i.e. roughly 2x 2023 revenue) and renewal rates holding steady at 98%. Performance was evenly spread across segments, products, and geographies, with notable strength in the US federal government. The company now boasts 1,933 customers generating in excess of $1 million in Annual Contract Value (ACV), which is pleasing to see as it implies multiple solutions are involved and that the company’s platform model is increasingly resonating with customers. In our view, ServiceNow is one the highest quality software businesses globally as the combination of consistent growth at scale, robust free cash flow generation and a large addressable market make it a compelling opportunity.”
8. Salesforce Inc (NYSE:CRM)
Number of Hedge Fund Investors: 117
UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.
“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.
The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.
Salesforce Inc (NYSE:CRM) was among these stocks in the Enabling Tech category.
According to UBS, revenue for enabling tech could rise to $1.2T by 2025, or ~15% CAGR from FY20–25.
In the second quarter, Salesforce’s revenue rose 8% year over year while gross profits jumped 10%.
Salesforce Inc (NYSE:CRM) is also on investors’ radar because of its acquisitions. The company recently agreed to acquire AI voice agent firm Tenyx. This acquisition follows Salesforce’s strategic partnership with Workday to develop an AI-powered assistant for employees. The company has also agreed to buy SaaS data protection startup Own for $1.9 billion in cash.
Wall Street expects $11.12 per share in profits for Salesforce Inc (NYSE:CRM) next year, representing a 10% year-over-year increase. For the current financial year, profits are expected to grow by 23%, with estimates trending upwards. Based on these forecasts, Salesforce trades at a forward price-to-earnings ratio of 22, which is attractive given the AI-related growth catalysts.
Columbia Threadneedle Global Technology Growth Strategy stated the following regarding Salesforce, Inc. (NYSE:CRM) in its Q2 2024 investor letter:
“In a tough backdrop for software companies, shares of Salesforce, Inc. (NYSE:CRM) cratered after the company reported quarterly results that surprised to the downside due to a tougher spending environment. The company reported revenue growth that missed on expectations, while also lowering its outlook for revenue growth, due to a more measured buying environment from its customers. Salesforce experienced elongated sales cycles, deal compression and elevated budget scrutiny, which pushed some deals to following quarters. Taking a step back, the company’s evolving AI story should not be overlooked as it is integrated across the company’s sprawling suite of cloud and digital assets.”
7. Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 130
UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.
“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.
The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.
Broadcom Inc (NASDAQ:AVGO) was among these stocks in the Enabling Tech category.
According to UBS, revenue for enabling tech could rise to $1.2T by 2025, or ~15% CAGR from FY20–25.
Broadcom Inc (NASDAQ:AVGO) continues to be a leader in the AI ASCI and networking chips market. The company expects about $12 billion in AI revenue in fiscal 2024, which means 20% of its total revenue will come from AI and counting.
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.
The company’s Ethernet business is also strong amid partnerships with Arista Networks (ANET), while the company is also collaborating with Dell (DELL), Juniper (JNPR), and Super Micro (SMCI) in the networking business and other segments.
ClearBridge Large Cap Value Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q3 2024 investor letter:
“In IT, we bought Broadcom Inc. (NASDAQ:AVGO) as we believe the company has a long runway for growth with its custom silicon business, which should be more durable and less volatile than other components within the AI food chain. We also believe the acquisition of VMware creates another opportunity for steady, subscription-based durable growth that is still in its early innings. We believe the stock has an attractive risk/reward profile given the reasonable visibility toward mid-teens EPS growth at a low-20s P/E multiple. We made room for Broadcom by exiting Lam Research, whose shares we believed priced in a full recovery, while we grew increasingly concerned that China exposure might create an air pocket.”
6. Alphabet Inc (NASDAQ:GOOG)
Number of Hedge Fund Investors: 165
Jefferies recently published a report citing an antitrust expert who believes it will take years for the DoJ to settle the case against Google.
“The antitrust expert hosted by our US Internet team believes it could take 3 to 8 years to settle,” analyst Edison Lee wrote in a note to clients.
The analyst specifically mentioned the impact of Alphabet Inc (NASDAQ:GOOG)’s loss in this case on Apple.
“We est if AAPL loses 1/3 of GOOG rev (US only) as of FY28, our DCF will be ~8% (US$19) lower.”
Lee, who holds a Hold rating on Apple, indicated that the revenue decline would only affect the U.S., though he warned that other countries might also react if the DOJ is successful. He assumes there would be no compensation from a revenue-sharing agreement with Alphabet Inc (NASDAQ:GOOG) or other search engines, representing the most pessimistic scenario.
Oakmark Select Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q3 2024 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) was the top detractor during the quarter. The U.S.-based communication services company’s stock price fell after a U.S. District Court ruled that Google violated Section 2 of the Sherman Act by maintaining a monopoly in general search engine services via exclusive distribution agreements. We think this case is unlikely to hurt Alphabet’s valuation over the long term as regulations previously en[1]acted in the European Union to address similar issues did not materially erode the company’s market share. We continue to believe that Alphabet is an attractive investment.”
5. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)
Number of Hedge Fund Investors: 176
UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.
“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.
The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) was among these stocks in the Enabling Tech category.
Revenue for enabling tech could reach $1.2 trillion by 2025, growing at around 15% annually from FY20 to FY25, according to UBS. The firm expects faster adoption of AI, cybersecurity, and other key technologies by businesses and governments, driven by increasing security breaches and the need to reduce costs through automation.
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is trending after impressive latest quarterly results. Here was the highlight of these results:
“The demand is real. And I believe it’s just the beginning of this demand. All right. So one of my key customers said, the demand right now is insane. That’s it’s just the beginning, it’s a form of scientific to be engineering.”
That was Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s CEO comment during Q3 earnings call.
Do the numbers back these “insane” demand claims? You bet.
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) reported consolidated sales of NTM 760 billion ($23.5 billion) for the quarter, surpassing the $23.3 billion expected by analysts. Sales grew 36% year-over-year, well above Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s target growth rate of around 20% CAGR set in 2021.
Management attributed the growth to strong demand for smartphones and AI-related products, particularly their advanced 3-nanometer and 5-nanometer technologies. The AI-related demand, which Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) refers to as the High Performance Computing (HPC) segment, saw double-digit growth, along with the Smartphone segment. Together, these two segments make up 85% of Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s revenue, with HPC now representing 51% of total revenue, up from 42% last year. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), which dominates the advanced chip fabrication market with a 90% share, showed its strength with these strong Q3 results.
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) raised its capital expenditure outlook for FY2024 to just over $30 billion, in line with FY2023. Around 70% to 80% of this budget will go toward advanced process technologies. Management highlighted that higher capital spending is linked to greater growth opportunities in the future. As a result, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is expected to focus on 2nm and A16 technology ramps next year to expand capacity for increasing demand in lower nanometer chips.
Despite the stock’s recent rally, it remains reasonably priced. It’s trading at 28x forward non-GAAP P/E and 9.3x forward EV/sales. While these figures are above the 5-year averages, they’re justified by Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s strong growth, with over 30% year-over-year expansion and significant margin improvements. This performance is well above the high-teens CAGR target set for 2021 to 2026. Moreover, its forward P/E remains below the Nasdaq 100’s 30.4x.
Diamond Hill Long-Short Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q2 2024 investor letter:
“On an individual holdings’ basis, top contributors to return in Q2 included our long positions in Alphabet, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) and Microsoft. Semiconductor manufacturer Taiwan Semiconductor’s (TSMC) fundamentals remain solid as demand for its chips continues growing — particularly as the machine learning and cloud computing trends gain more traction.”
4. Nvidia Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 179
BofA increased Nvidia Corp (NASDAQ:NVDA)’s full-year 2025 earnings estimate to $2.87 per share from $2.81, lifted the 2026 estimate to $4.47 from $3.90, and adjusted the 2027 estimate to $5.67 from $4.72. The firm also maintained its Buy rating and raised its price target to $190, up from $165. Nvidia shares have approached new highs this week.
“We see NVDA’s free cash flow generation, with a 45-50%+ margin, as underappreciated, nearly double the 23-25% average of the Mag-7,” said BofA analysts, led by Vivek Arya, in a note. “In dollar terms, NVDA could generate over $200 billion in free cash flow over the next two years, putting it in the same league as Apple (AAPL) and giving it room to grow.” BofA also pointed to Nvidia Corp (NASDAQ:NVDA)’s increasing role in enterprise collaborations with companies like Accenture (ACN), ServiceNow (NOW), and Microsoft (MSFT)
Nvidia Corp (NASDAQ:NVDA) holds a commanding 80% to 85% share in a $400 billion market, which has prompted BofA Securities to raise its earnings forecasts for the company.
Nvidia’s declines after the Q2 results were more or less expected amid Blackwell delay reports confirmed by management. However, the delays were mainly due to a change in Blackwell GPU mask. That does not affect the main functional logic or design of the chip, according to analysts. While Blackwell has been delayed for a few months, it does not change the core growth thesis for Nvidia.
Nvidia is set to see huge growth on the back of the data center boom amid the AI wave.
At Nvidia’s GPU Technology Conference in March 2024, CEO Jensen Huang estimated annual spending on data center infrastructure at about $250 billion. Over the next decade, this could total between $1 trillion and $2 trillion, depending on how long this level of investment continues. During the same Q&A session, Bank of America’s Vivek Arya echoed this estimate, suggesting the total addressable market would fall in the $1-2 trillion range, particularly as countries invest in their own AI infrastructure. By the end of the decade, spending could be at the high end of that range.
Of course, Nvidia won’t dominate the entire $2 trillion opportunity, as it faces competition from companies like AMD and internally developed AI accelerators from Google, Amazon, and even Apple. Some analysts believe Nvidia’s data center market share between 2025 to 2029 will be over $950 billion—less than half of the total market—but still enough to make it the leader in the sector.
Vltava Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2024 investor letter:
“Over the summer, we devoted a lot of time to studying the AI-related investment wave. This spans a wide range of sectors and our view could be very briefly summarised as follows: The first-tier beneficiaries are primarily companies in the semiconductor sector, NVIDIA Corporation (NASDAQ:NVDA) perhaps the most. That company is benefiting from the huge increase in investment by large technology companies to build enormous data centres. We know who NVIDIA’s customers are. They are companies like Meta, Alphabet, Amazon, and Microsoft. They are investing hundreds of billions of dollars into their AI capabilities. What is not entirely clear, however, is who are and will be the customers of NVIDIA’s customers, and, more importantly, when, and if, they will be able to come up with such huge demand for AI services that the profits from AI will justify and pay for the enormous investments all these companies have been making. The further we move away from the starting point that NVIDIA represents in our more broadly-reaching estimates, the lessreliable those estimates are.So far, we know just one thing for sure, and that is that investments in AI capabilities are ongoing and they are huge. They are not only bringing large demand to chipmakers and the semiconductor sector but to some other sectors as well. Indeed, building AI clusters also requires the construction of new semiconductor factories, new energy sources, and all the associated infrastructure. The numbers under consideration are incredibly high. It is possible that over the next decade the construction of AI centres will necessitate a 20% increase in US energy consumption. The investment required will be measured not in the hundreds of billions of dollars, but in an order of magnitude higher. Maybe two orders of magnitude.”
3. Apple Inc (NASDAQ:AAPL)
Number of Hedge Fund Investors: 184
Finally, something to cheer for Apple Inc (NASDAQ:AAPL) bulls. A latest report showed iPhone 16 sales in China increased by 20% year-over-year during the first three weeks of launch, indicating that a “renaissance of growth has begun” for Apple Inc (NASDAQ:AAPL), according to Wedbush Securities.
“We note that both iPhone 16 and Huawei’s new model went on sale September 20th in this key region,” analyst Dan Ives wrote in a note to clients. “The strength from Apple in particular is coming from the higher end Pro and Pro Max as models are up an eye-popping 44% from a year ago iPhone 15 sales. This industry analysis is consistent with our recent Asia trip and supply chain checks that we believe China sales for iPhone 16 will show a strong rebound over the next year with the beginning of this AI driven super cycle led by iPhone 16.”
Ives kept his Outperform rating and $300 price target for Apple Inc (NASDAQ:AAPL). He added that Apple Inc (NASDAQ:AAPL) is expected to collaborate with Baidu (BIDU) for AI initiatives in China, much like its partnership with OpenAI in the U.S. This could further boost iPhone upgrades in the region, he suggested.
“Apple launching AI coupled by a massive pent-up upgrade cycle is creating this new era of iPhone growth including in the key China region which has been a drag on the top-line over the past year. We believe there are 100 million Chinese iPhones in the window of an upgrade opportunity alone for 2025.”
Ives also said Apple Inc (NASDAQ:AAPL) might sell over 240 million iPhones “as this AI-driven upgrade cycle takes hold.”
However, buying Apple just on iPhone 16 hopes could be risky.
Almost every bullish case on Apple Inc (NASDAQ:AAPL) was built around this assumption: millions of people would rush to upgrade their iPhone because of AI features. But the latest numbers for iPhone 16 do not show much enthusiasm for the new device.
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. This trend isn’t great for Apple Inc (NASDAQ:AAPL). Can Apple Intelligence break this trend? We’ll find out soon.
However, the assumption that we will see a huge upgrade cycle of iPhone just because of AI is big and comes with a lot of risks. Apple Inc (NASDAQ:AAPL) trades at a forward PE multiple of around 35x, well above its 5-year average of nearly 27x. Its expected EPS forward long-term growth rate of 10.39% does not justify its valuation, especially with the iPhone upgrade cycle assumption. Adjusting for this growth results in a forward PEG ratio of 3.33, significantly higher than its 5-year average of 2.38.
Vltava Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q3 2024 investor letter:
“You probably have not missed the news that Warren Buffett has already sold half the stock from his largest public markets investment, Apple Inc. (NASDAQ:AAPL). It was a phenomenal investment for Berkshire. Over the course of seven years or so, it brought a profit of well over USD 100 billion. Apple comprised a very large position within Berkshire’s public portfolio, and this was the reason we avoided Apple stock outright during that time. We considered our exposure to Apple through our holdings of Berkshire stock to be sufficient, and we ended up making a lot of money on it. There has been a great deal of speculation in the market about what Buffett’s sale of Apple signals regarding his view of the stock market. I think the reason for the sale is much simpler. Buffett probably considers Apple stock so expensive that he prefers to cash in at 20% less (after all, Berkshire must pay tax on its profits). He started selling in the first quarter of the year. When I was in Omaha for the general meeting in May, Buffett said he was still selling, and I expect he continued to do so in the third quarter. I have to say that, as a Berkshire shareholder, I am happy about the Apple sale. I think Berkshire’s management will find a better use for this money, as they always have in the past. It is quite likely that they already have a very specific idea about this. If that takes two or three years, it does not matter at all. This is not a race and, in the meantime, the risk of holding Berkshire Hathaway stock itself has been greatly reduced.”
2. Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Investors: 219
UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.
“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.
The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.
Meta Platforms Inc (NASDAQ:META) was among these stocks in the Enabling Tech category.
According to UBS, revenue for enabling tech could rise to $1.2T by 2025, or ~15% CAGR from FY20–25.
Meta Platforms Inc (NASDAQ:META) crushed past analyst estimates for its Q2 results, giving signs that the huge AI spending it’s doing would bear more results in the future.
The market has been reluctant about Meta Platforms Inc (NASDAQ:META) massive spending on AI. What does Meta want to achieve with its AI spending? The company wants to use AI to improve engagement and language models like Llama 3 to improve user interactions, boost engagement, and better monetize its 3.2 billion daily active users.
But can Meta Platforms Inc (NASDAQ:META) sustain this high spending? The company’s free cash flow margin is around 30%, and it’s well on track to report $50 billion in free cash flow this year. Based on this target the stock is trading at around 26 times this year’s free cash flow. Given the current trajectory continues Meta Platforms Inc (NASDAQ:META) can post $58 billion in free cash flow by next year, which means the stock is trading at 21 times next year’s free cash flow. With a whopping $35 billion in net cash, a strong user base, and a key position in the consumer-facing side of the AI industry, Meta Platforms Inc (NASDAQ:META) could be a solid long-term investment.
Rowan Street Capital stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter:
“We are pleased to report that Meta Platforms, Inc. (NASDAQ:META), our largest position in the fund, has delivered a remarkable performance, +450% since our November 2022 note. Our investment in Meta dates back to 2018, with an average cost basis of approximately $172 per share. Today, the stock trades around $535, reflecting a 3x return over the six-year holding period, equating to a 20% annualized return.
We would like to remind you that achieving these types of returns is never a straight path. From time to time, we might experience volatility — that’s simply part of the investment journey. In fact, wealth creation and volatility go hand in hand. There’s no escaping it; it’s the “price of admission” the market demands. If you take a look at the chart below, you’ll notice the drawdowns META stock has faced over the years, with 2022 standing out as a particularly challenging period, where the stock saw a 75% drop…” (Click here to read the full text)
1. Microsoft Corp (NASDAQ:MSFT)
Number of Hedge Fund Investors: 279
KeyBanc’s third-quarter 2024 survey of value-added resellers (VARs) has noted a rise in IT budget expectations.
“For 2024, IT budgets saw a slight growth in expectations, but the bigger shift was in 2025, where budgets are now expected to grow by 4.4%, up from 3.2% just 90 days ago,” said KeyBanc analysts, led by Jackson Ader, in a detailed report to investors.
“Today, 37% of VARs expect IT budgets to bounce back in early 2025,” Ader said. “That’s a rise from last quarter, and the fact that it starts soon gives more clarity than before.”
Based on this survey, the firm gave bullish ratings to several stocks, including Microsoft Corp (NASDAQ:MSFT). Microsoft’s target was increased to $505 from $490.
DA Davidson recently downgraded the stock, with analyst Gil Luria saying the company’s advantages in the cloud and code generation sectors have diminished, making it difficult for Microsoft Corp (NASDAQ:MSFT) to maintain its previous performance. He highlighted that Amazon Web Services is now nearly matching Azure in cloud growth, while Google Cloud is also gaining momentum. Luria downgraded Microsoft Corp (NASDAQ:MSFT) from Buy to Neutral, maintaining a $475 price target. He pointed out that Amazon and Google have made significant strides in integrating custom silicon into their data centers, putting Microsoft at a disadvantage. This reliance on NVIDIA (NVDA) for technology means Microsoft is effectively transferring wealth from its shareholders to NVIDIA’s, according to Luria.
Following a year of margin expansion, Microsoft Corp (NASDAQ:MSFT) is now projecting a decline in operating margins due to increased data center capital expenditures rising from 12% to 21% of revenue. This increase outpaces that of Amazon and Google, largely due to Microsoft’s dependence on NVIDIA. Luria said that if Microsoft Corp (NASDAQ:MSFT) continues to overinvest at the current rate, margins could drop by at least 1 percentage point cumulatively, potentially necessitating layoffs of around 10,000 employees each year to maintain margins. The analyst also thinks Microsoft Corp (NASDAQ:MSFT) has lost much of its edge with GitHub Copilot, as Amazon and GitLab (GTLB) have caught up in capabilities.
The concerns voiced by the analyst are not unfounded. Microsoft is also losing its edge in open-source models as enterprises shift toward cost-effective, transparent open-source solutions like Meta’s Llama 3.1.
Generation Investment Management Global Equity Strategy stated the following regarding Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:
“Generative AI’s hunger for power has increased disproportionately with its intelligence. According to one estimate, OpenAI’s GPT-4 required 50 gigawatt hours (GWh) of electricity to train, much more than the 1.3 GWh needed for GPT-3.3 And then AI requires even more power when it is put to use (so called ‘inference’). Some of the latest trends worry us. Microsoft Corporation (NASDAQ:MSFT) appears to be slipping in its ESG goals, with its greenhouse gas emissions rising again last year, as it invests in becoming a big player in AI. It is struggling in particular to curb its Scope 3 emissions in the capital goods category – nowhere more so than in the activity associated with the construction of data centres: both the embedded carbon in construction materials like steel and cement, as well as the emissions from the manufacturing of hardware components such as semiconductors, servers and racks. Google’s emissions have risen by close to 50% in the past five years.
We feel it is worth dwelling on Microsoft for a few moments, since we suspect you will be hearing a lot more about the relationship between AI and sustainability in the coming months. The bottom line is that we continue to see Microsoft as a sustainability leader. In the case of Scope 2 emissions, the company covers 100% of its electricity use with purchases of renewable energy. Crucially, though, the majority of this green energy is directly sourced via power purchase agreements, which bring new renewable capacity to the grid. Microsoft is also committed to operating 24/7 on renewable power by 2030, a policy that will help bring energy storage onto the grid as well…” (Click here to read the full text)
While we acknowledge the potential of Microsoft Corp (NASDAQ:MSFT), 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
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