Four AI Stocks to Watch

Artificial Intelligence Boom

OpenAI took the world by storm nearly a year ago with the launch of ChatGPT, its generative artificial intelligence (AI) chatbot – by By Nikos Tzabouras

This sparked an AI boom that drove Nasdaq 100 to a more than 40% rally during the first eight months of 2023.

Big Tech now races for AI supremacy, as the technology has the potential to transform essentially every aspect of daily life. According to recent research by Goldman Sachs, private AI investment will reach nearly 160 billion by 2025 [1]. The technology also raises various questions around privacy, bias, regulation and other aspects. Many tech leaders had called for a pause on the training of AI systems more powerful than GPT-4, since they “can pose profound risks to society and humanity”. [2]

In any case, the AI era is upon us and Microsoft, Nvidia, Arm and Tesla are some of the companies that do leading work in this field, standing to benefit from this revolution.

Microsoft

The tech behemoth is at the forefront of the AI revolution, having invested billions in OpenAI, whose ChatGPT chatbot sparked the generative AI craze. Microsoft was able to quickly harness that partnership and announce a new AI-powered Bing search engine in February, a move that has the potential to alter the search status quo. [3]

It has since incorporated AI capabilities to more products, including to its advertising business [4] and has moved to the next stage, which is AI monetization. Over the summer, it announced a subscription service for a monthly fee, which corporations will be able to use on products like Excel, Word and Teams. [5]

Microsoft has the valuable first mover advantage and is already furthering its AI ambitions past standalone applications. However, competitors such as Alphabet are making progress after an initial slow start. The latest quarterly results reflected the challenges to its search engine business, but they also showed that its dominance is not under immediate threat by Microsoft’s AI advance.

Nvidia

The chip-designer is the elephant in the room when it comes to AI, since this year’s boom would not be possible without it. Its GPUs are essentially the only game in town when it comes to handling the demanding AI workloads, with the development and deployment of applications such as ChatGPT relying on its infrastructure.

Its leading work in the field is already bearing fruit, since its stock has roughly tripled this year and the firm posted blockbuster quarterly results (Q2 FY2024) in August, fueled by strong demand for its AI infrastructure. Revenues doubled from a year ago to a record of $13.507 billion and profits ballooned to $6.188 billion. [6]

However, there are some concerns that the firm may be overly optimistic around future supply and demand, amidst broader production challenges and export restrictions to China. Its near-monopoly also won’t last forever, as other firms are trying to catch up. Advanced Micro Devices (AMD) for instance recently unveiled a new AI chip, the MI300X, to go up against Nvidia. [7]

Arm Holdings

Arm is essential to the mobile devices market, since nearly all of the world’s smartphones run on Arm-based processors [8]. Its presence spans into other realms though, including artificial intelligence (AI).

Trying to capitalize on the AI boom, the firm went public with its Nasdaq debut, in the biggest IPO of the year. Speaking on the listing, its CEO said that “you can’t really run AI without Arm” [9]. In a testament to its importance, Nvidia, the enabler of this revolution, unveiled its next-gen AI superchip, based on Arm’s Neoverse [10].

With many tech heavyweights using its designs, Arm stands to benefit from increasing spend on AI, since that could boost its license and royalty revenues. However, its recent results aren’t exactly awe-inspiring. It had a net income of just $524 million in Fiscal 2023 – very low for its sky-high valuation. Revenue stagnated at around $2.5 billion in Fiscal 2023, with 24% derived from China, which creates concern given current Sino-Western frictions and trade restrictions. [11]

Tesla

The king of the electric vehicle (EV) market may not be the first thing that comes to mind when thinking of AI, but the technology is at the heart of the firm. In July’s Q2 results, Tesla stressed its “commitment to being at the forefront of AI development”, with the production of its Dojo supercomputer, which can boost various aspects of its business including autonomous driving. [12]

Tesla has vast amounts of proprietary data it collects from sources like the cameras and sensors in the hundreds of thousands of vehicles it has sold. It uses AI to leverage this data and achieve full self-driving (FSD). Mr. Musk believes FSD will be “better than human” by the end of the year. However, there is no regulatory approval yet and Musk has been overly optimistic in the past on the matter. To his own admission, he is “the boy who cried FSD”. [13]

Success on the AI front can unlock tremendous value for Tesla and give it an edge over its competitors, who are making strides in electrification. Companies with massive amounts of real-world data, like the ones Tesla owns, can emerge as key beneficiaries of the AI boom.

References:

[1] https://www.goldmansachs.com/intelligence/pages/ai-investment-forecast-to-approach-200-billion-globally-by-2025.html

[2] https://futureoflife.org/open-letter/pause-giant-ai-experiments/

[3] https://blogs.microsoft.com/blog/2023/02/07/reinventing-search-with-a-new-ai-powered-microsoft-bing-and-edge-your-copilot-for-the-web/

[4] https://about.ads.microsoft.com/en-gb/blog/post/june-2023/the-future-is-now-with-predictive-targeting

[5] https://blogs.microsoft.com/blog/2023/07/18/furthering-our-ai-ambitions-announcing-bing-chat-enterprise-and-microsoft-365-copilot-pricing/

[6] https://investor.nvidia.com/financial-info/financial-reports/default.aspx

[7] https://www.youtube.com/watch?v=Gqfw_keUQAI

[8] https://www.arm.com/company

[9] https://www.youtube.com/watch?v=gZsL7RQnIAs

[10] https://nvidianews.nvidia.com/news/gh200-grace-hopper-superchip-with-hbm3e-memory

[11] https://www.sec.gov/Archives/edgar/data/1973239/000119312523228059/d393891df1a.htm

[12] https://digitalassets.tesla.com/tesla-contents/image/upload/TSLA-Q2-2023-Update.pdf

[13] https://www.youtube.com/watch?v=eUEojntzzAk