AI Stocks: Tech Giants Face New ‘Show Me’ Moment

Is the artificial intelligence stock market boom still wired or tired? Top AI stocks such as Microsoft (MSFT) and Nvidia (NVDA) face high expectations. For many companies — such as Google parent Alphabet (GOOGL), Amazon.com (AMZN) and Facebook parent Meta Platforms (META) — the rise of generative AI poses both risk and opportunity.

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Amid the emergence of generative AI — which can generate text, images, and video — it’s a good time to be cautious amid the hype. Many companies suddenly tout AI product roadmaps. In general, look for AI stocks that use artificial intelligence to improve products or gain a strategic edge.

Key Issues For Top AI Stocks

Memory-chip giant Micron Technology (MU) beat estimates for its fiscal fourth quarter and guided higher than views for the current period.

Apple (AAPL)  has been one of the top AI stocks to watch. Apple stock has gained 17% in 2024. The big question is whether Apple Intelligence features in iPhone 16 models will spur a big upgrade cycle.

Meanwhile, Apple is in talks to invest in OpenAI as part of a new funding round that would value the startup at over $150 billion. Microsoft is currently the biggest investor in startup OpenAI, the leader in generative AI.

OpenAI is planning to convert from a nonprofit organization to a for-profit company.

Further, OpenAI has released a new large language training model capable of enhanced reasoning skills. Code-named “Strawberry,” it’s officially called OpenAI o1. The company says  OpenAI o1 outperforms its earlier training model, GPT-4o. But it’s more expensive to run than GPT-4o.

OpenAI o1 breaks apart complex problems into more manageable pieces before answering, and, through reinforcement, it learns to recognize and correct mistakes and try a different approach when the current approach isn’t working. It’s available to premium business customers initially.

Chipmaker Nvidia has been a bellwether for AI stocks. Nvidia stock has climbed  jumped 149% in 2024 after surging 239% last year. Further, Nvidia stock remains on the IBD Leaderboard. For Nvidia, ramping up production of next-generation Blackwell AI chips in 2025 will be key. NVDA stock has become actionable.

In general, semiconductor plays have out-performed software companies as the best AI stocks.

Palantir Among Best AI Stocks

But data analytics software maker Palantir (PLTR) has bucked the trend that chipmakers are the best AI stocks. PLTR stock has gained 116% this year.

Many software companies, meanwhile, have yet to monetize AI products. One big issue for software companies is how fast customers ramp up pilot programs to commercial deployment.

Salesforce (CRM)  touted the “Agentforce” platform — its next wave of AI products — at its Dreamforce customer conference.  Salesforce is pivoting to AI agents from co-pilot technology.

AI Stocks Now A ‘Show Me’ Story

The best AI stocks to buy span chipmakers, software companies, cloud computing service providers and technology giants.

Capital spending boomed in the June quarter at cloud computing giants Amazon, Microsoft and Google. Tech giants are spending heavily on data center infrastructure, such as AI chips and servers, as well as research and development.

Amid increased capital spending by cloud computing giants, the big question is how much incremental AI-related revenue they’re getting. What’s clear is that AI stocks are under more scrutiny.

“We expect AI to transition from a ‘tell me’ to a ‘show me’ story, with any disconnect between investments and revenue generation to come under increased scrutiny,” said a Bank of America report. “

Meta Builds Llama AI Models

Facebook-parent Meta is among the top AI stocks to watch. Meta stock has gained 60% in 2024.

While OpenAI is the leader in building generative AI large language training models, Meta has been building up its own Llama family of AI models. They’re available on Amazon Web Services, for example.

“Looking at the valuations of private AI companies, we think that Llama — given its leading share of open source deployments, access to data, compute, and Meta’s massive consumer user base warrants a valuation of $10 billion to $20 billion — resembling that of (Elon Musk’s) xAI and Anthropic but below OpenAI’s $150 billion due to lack of monetization,” said Jefferies analyst Brent Thill in a report.

Also, Meta has launched AI Studio, which enables businesses to build custom AI agents.

Meanwhile, Nvidia and Arista Networks (ANET) are squaring off in the AI Ethernet networking market. Also, Arista stock has gained 63% in 2024.

Arista stock ranks No. 21 in the IBD 50 roster of growth stocks while Palantir stock ranks No. 17. Meta ranks No. 37.

AI Stocks: Software Monetization An Issue

So far, the biggest demand for AI chips has come from cloud computing giants and internet companies.

Broadcom (AVGO), Qualcomm, ARM Holdings (ARM), and Marvell Technologies (MRVL) are other AI chipmakers to watch.

Also, for most big application software companies, how to charge for AI-related products has been an issue.

Further, most enterprise software makers will not monetize generative AI, or “conversational AI,”  in a material way until late 2025, some analysts say. Many U.S. companies are pursuing custom AI software development projects, which will take longer to ramp up commercially.

Meanwhile, here’s a look at the enterprise AI market.

Also, AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions.

Until recently, machine learning was largely limited to models that processed data to make predictions. The AI models focused on pattern recognition from existing data. Corporate spending on AI projects was modest as companies mulled return on investment.

AI Stocks To Watch By Industry Group

New generative AI models process “prompts,” such as internet search queries, that describe what a user wants to get. Generative AI technologies create text, images, video and computer programming code on their own.

Companies will aim to boost productivity by developing customized AI for specific industries. Proprietary company data will be used to train AI models.

AI systems require massive computing power to find patterns and make inferences from large quantities of data. So the race is on to build AI chips for data centers, self-driving cars, robotics, smartphones, drones and other devices.

Will AI Startups Challenge Tech Giants

For chipmakers, analysts expect a market for “edge AI” — on-device processing of AI apps to emerge.

While “training” AI models is now the biggest market for chipmakers like Nvidia, the market will shift to “inferencing,” or running AI applications, in the long run.

What’s more, one key question for investors is whether tech industry incumbents will be the big generative AI winners. Or, will a new wave of AI startups eventually dominate? OpenAI has told employees its now on an annual revenue run-rate of $3.4 billion, up from $2 billion in January.

Large language models provide the building blocks to develop applications. Further, LLMs help AI systems understand the way that humans write and speak. Also, LLMs require training data for specific tasks. Companies with access to troves of data hold an edge.

Artificial Intelligence ETFs To Watch

OpenAI is part of a wave of LLM startups that includes AI21 Labs, Anthropic and Cohere. Anthropic introduced Claude 3, the newest version of its chatbot, and claimed its performance is better than OpenAI’s GPT-4.

However, OpenAI’s dominance faces a challenge from open-source LLMs.  Musk’s xAI announced it will open source its Grok LLM, and released the source code for public use.

According to etf.com,  there are 41 ETFs with assets of $10.9 billion that invest based on AI themes.

“We were also surprised that the five largest ones collectively underperformed the S&P 500 both year-to-date and over the past three years,” said economist Ed Yardeni in a report. “Many of the ETFs appear to be underperforming because AI and robotics investments are being lumped together. Robotics companies haven’t fared nearly as well as AI poster child Nvidia. The top performing large ETF in this category, Global X Artificial Intelligence & Technology, avoids robotics exposure. It invests in developers of products incorporating AI systems, like software programmers and social media platforms. Its top holdings: ServiceNow (NOW), IBM (IBM), Alibaba (BABA), Oracle (ORCL) and Meta.”

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.

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