Is the artificial intelligence stock craze still going strong or are you tired of it? Top AI stocks like Microsoft (MSFT) and Nvidia (NVDA) have high hopes. For many companies, including Google parent Alphabet (GOOGL), Amazon.com (AMZN) and Facebook parent Meta Platforms (META), the rise of generative AI poses both risks and opportunities.
↑ X Playing Semiconductor Stocks: AI Chip Boom Will Drive Growth in Semiconductor Industry
With the advent of generative AI, which can generate text, images, and videos, it's time to be cautious amid all this noise. Many companies are suddenly touting AI product roadmaps. In general, look for AI stocks that use artificial intelligence to improve their products or gain a strategic advantage.
Major events for AI-related stocks in September
One notable development in September is that Apple (AAPL) will announce the iPhone 16 lineup at the “Glowtime” event to be held at its headquarters in Cupertino, California on September 9. The iPhone 16 lineup will be equipped with “Apple Intelligence.”
At its Worldwide Developers Conference, Apple announced that it would be integrating OpenAI's ChatGPT into its Siri voice assistant and iOS 18. The big question is whether the “Apple Intelligence” feature will drive a major upgrade cycle for the iPhone 16 in late 2024-2025.
Meanwhile, Apple is in talks to invest in OpenAI as part of a new funding round that could value the startup at more than $100 billion. Microsoft is currently the largest investor in OpenAI, a startup leader in generative AI.
Artificial intelligence is likely to be a big topic at the Goldman Sachs Communacopia & Technology conference, which runs from September 9 to 12. For example, Google cloud computing leader Thomas Kurian will be at Communacopia on September 10. Dario Amodei, CEO of startup Antropic, will also be on stage on September 10. Nvidia CEO Jensen Huang will be on stage on September 12.
Analysts also expect Salesforce (CRM) to demonstrate AgentForce, a new autonomous agent for business customers, at its annual DreamForce user conference in mid-September.
Additionally, Oracle (ORCL) will be hosting CloudWorld. “AI will be the theme at CloudWorld, and we expect to see announcements of AI Factory and a partnership with AWS,” the Mizuho Securities report said.
AI stocks are now a “show me” thing
The best AI stocks to buy range from chipmakers, software companies, cloud computing service providers, and technology giants. With capital expenditures by cloud computing giants on the rise, the big question is how much can they grow their AI-related revenues?
What's clear is that AI stocks are coming under increased scrutiny.
“As AI moves from 'tell' to 'show', the disconnect between investment and revenue generation is expected to come under greater scrutiny,” the Bank of America report said.
Broadcom (AVGO) shares fell following its third-quarter results and outlook.
“AVGO delivered full-year AI revenue growth, but results were slightly below expectations and overall revenue guidance was slightly below market expectations,” UBS analyst Timothy Arcuri said in a report. “We expect the hyperscale capital spending environment to remain very strong next year, and we believe it is plausible for AVGO's AI revenue to grow by another 35-40%, especially as the company has gained several large custom accelerator customers outside of Google.”
Nvidia Stock: AI Antitrust Investigation?
Chipmaker Nvidia, a bellwether AI stock, reported its second-quarter results on Aug. 28. Its October-quarter earnings forecast disappointed some investors due to margin pressure.
Moreover, amid growing concerns, Nvidia and other AI chip stocks plummeted on September 3. The Department of Justice is also reportedly investigating concerns that AI chip giant Nvidia is abusing its dominance in artificial intelligence, issuing subpoenas to Nvidia and other companies.
After soaring 239% last year, Nvidia shares are forecast to rise 114% in 2024. What's more, Nvidia stock remains on the IBD Leaderboard.
Shares of Marvell Technologies (MRVL) soared after the company's second-quarter results and outlook as it ramps up production of custom AI chips for Amazon and Google.
Meanwhile, Nvidia and Arista Networks (ANET) are battling it out in the AI Ethernet networking market. The data center equipment maker delivered strong results in the second quarter, and Arista shares are up 37% in 2024.
Big tech companies are investing heavily in data center infrastructure, including AI chips and servers, as well as research and development. Capital spending by Google, Microsoft, Meta Platforms and Amazon surged in the June quarter.
Semiconductor stocks have generally performed better as AI stocks than software companies, but data-analysis software maker Palantir (PLTR) is bucking the trend. PLTR shares are up 76% this year.
Arysta stock has fallen off the IBD 50 growth stock list, while Palantir stock ranks 16th.
AI Stocks: Monetizing Software is a Challenge
So far, the biggest demand for AI chips has come from cloud computing giants and internet companies, while chipmaker Advanced Micro Devices (AMD) beat consensus expectations for the second quarter.
Broadcom Qualcomm (QCOM), ARM Holdings (ARM) and Marvell Technologies are other AI chipmakers to watch.
One of the big questions for AI stocks is how quickly companies will move pilot programs into commercial deployments.
Additionally, Microsoft's Azure cloud computing growth in the fourth quarter fell short of Wall Street targets, and its generative AI “Co-Pilots” have yet to boost Microsoft's Office 365 business, analysts said.
However, ServiceNow (NOW) rose on second-quarter revenue and outlook.
Additionally, many large application software companies have been challenged with how to price their AI-related products.
Moreover, some analysts say most enterprise software makers won't be able to monetize generative, or “conversational, AI” in any meaningful way until the second half of 2025. Many U.S. companies have custom AI software development projects underway, but commercial launch will take longer.
Meanwhile, let's look at the enterprise AI market.
AI technology also uses computer algorithms: software programs that aim to mimic the human ability to learn, interpret patterns, and make predictions.
Until recently, machine learning was primarily limited to models that processed data to make predictions. AI models focused on pattern recognition from existing data. Enterprise spending on AI projects was modest as companies considered the return on investment.
AI stocks to watch by industry group
Company Symbol Competitive Rating Industry AI Angle Nvidia (NVDA) 95 Electrical & Semiconductors Fabless The cloud computing giant is buying more chips to train AI models and run AI workloads. It's a big lead over rival Advanced Micro Devices (AMD). CrowdStrike (CRWD) 77 Computer Software & Security The AI chatbot is expected to further automate security operations center functions and improve the time it takes to detect computer hacks. Arista Networks (ANET) 97 Computer Networking Sells computer network switches that speed up communication between racks of computer servers packed into “hyperscale” data centers. As AI grows, Internet data centers will need more network bandwidth. Microsoft (MSFT) 67 Computer Software & Desktop The largest investor in generative AI startup Open AI. Its ChatGPT users need Azure cloud services. Microsoft's business AI assistant, Office 365 Copilot, will be available to the public on November 1. Salesforce (CRM) 67 Computer Software – Enterprise It will integrate a conversational AI assistant within the user interface of all Salesforce apps. It will use a combination of subscription and consumption-based pricing. Amazon.com (AMZN) 82 Retail – Internet The Alexa smart assistant has lagged behind in chatbot technology. The cloud computing unit is working with OpenAI rivals Anthropic, Hugging Face and Falcon 40B.
The new generative AI models process “prompts,” such as internet search queries that describe what a user wants to get. Generative AI technology creates its own text, images, videos, and computer programming code.
Companies aim to improve productivity by developing AI customized for their specific industry, using their own data to train the AI models.
AI systems require massive amounts of computing power to find patterns and make inferences from vast amounts of data, which is why the race is on to develop AI chips for data centers, self-driving cars, robots, smartphones, drones and other devices.
Can AI startups challenge tech giants?
For chipmakers, analysts expect a market to emerge for “edge AI,” or on-device processing of AI apps.
“Training” AI models is currently the largest market for chipmakers like Nvidia, but in the longer term the market will shift to “inference” – running AI applications.
Moreover, a key question for investors is whether tech incumbents will be the big winners in generative AI, or whether a new wave of AI startups will ultimately dominate.OpenAI told employees that its annual revenue has grown to $3.4 billion, up from $2 billion in January.
Large-scale language models provide the foundation for developing applications. Additionally, LLMs help AI systems understand how humans write and speak. LLMs also require training data for specific tasks. Companies with access to large amounts of data have an advantage.
OpenAI is part of a wave of LLM startups that includes AI21 Labs, Anthropic and Cohere. Anthropic announced the latest version of its chatbot, Claude 3, and claimed its performance is better than OpenAI's GPT-4.
But OpenAI's dominance is facing a challenge from open source LLM. Musk's xAI announced it was open sourcing its Grok LLM, making the source code publicly available.
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