AI Stock Market: Opportunities Amid Volatility

2 Artificial Intelligence Stocks I'm Buying On the Dip | The Motley Fool

Nvidia and Amazon could be smart buys for long-term growth in the AI revolution. The artificial intelligence (AI) revolution has hit a speed bump. On June 25, 2024, Goldman Sachs released a thought-provoking research report titled "Gen AI: Too Much Spend, Too Little Benefit?" This analysis sent ripples through the tech sector, causing many AI-centric stocks to stumble. Goldman's report paints a sobering picture of AI's near-term economic impact. It suggests that building out AI infrastructure could cost a staggering $1 trillion. More concerningly, the report argues that AI's cost-saving potential may not justify this enormous price tag. It also raises concerns about looming energy constraints potentially limiting AI's ability to boost top-line growth outside the chipmaking industry. Investors, already jittery from a slowing economy and geopolitical tensions, seemed to take these arguments to heart. The result? A significant pullback in many of the market's most prominent AI players. While Goldman's analysis raises valid points, I believe it may be overly focused on short-term hurdles. AI isn't going to revolutionize the world overnight, but its transformative potential is undeniable. We're witnessing the early stages of a technological shift that will reshape industries, boost productivity, and create entirely new business models. Consider this: AI is currently in its infancy. The advances we'll see in the next two to three years will likely make today's AI look primitive by comparison. I'm convinced we're on the cusp of seeing the emergence of true "killer apps" -- AI-powered innovations that drive widespread adoption and showcase the technology's game-changing capabilities. Moreover, once AI becomes deeply integrated into popular ecosystems like Apple's, we'll likely see a quantum leap in public awareness and appreciation of AI's potential. This near-term event could trigger a new wave of investment and innovation across the tech sector. With this long-term perspective in mind, I see the current dip in AI stocks as a compelling buying opportunity for patient investors. Two companies in particular stand out as attractive options for investors looking to capitalize on the AI revolution: Nvidia (NVDA -1.78%) and Amazon (AMZN -8.79%). Here's why. Nvidia, the chipmaker at the heart of the AI boom, has seen its share price drop by nearly 15% since Goldman's report. This double-digit pullback presents an intriguing entry point for a company that's absolutely dominating the AI chip market. Nvidia's graphics processing units (GPUs) have become the de facto standard for AI processing, powering everything from autonomous vehicles to large language models. The company's recent financial results underscore this fact. In fiscal 2024, Nvidia reported a staggering 126% year-over-year jump in revenue and an equally impressive gross margin of 73%. What excites me most about Nvidia, though, is its relentless innovation. Its next AI GPU, Blackwell, showcases the company's commitment to pushing the boundaries of this game-changing tech. Given its outsize market share and focus on innovation, Nvidia is in a prime position to benefit from an AI-powered future. E-commerce and cloud computing giant Amazon has also felt the impact of Goldman's report, with its stock shedding 10% of its value. However, I see this as a chance to invest in a company that's integrating AI across its vast business empire. Amazon's AI strategy is multifaceted. In e-commerce, AI powers everything from product recommendations to inventory management and logistics optimization. Amazon Web Services (AWS) offers a comprehensive suite of AI and machine learning tools, enabling businesses of all sizes to harness the power of AI. While Amazon's recent growth hasn't been as explosive as Nvidia's, it's still noteworthy. Wall Street is expecting a 22% rise in sales over the course of 2024 and 2025 for the e-commerce titan. Consistent double-digit revenue growth is an impressive achievement, especially for a megacap company like Amazon. The bottom line is that Amazon's massive data resources and cloud infrastructure give it a significant edge in developing and deploying AI solutions at scale. The current market skepticism around AI, as reflected in Goldman's report, may be overlooking the technology's long-term transformative potential. Both Nvidia and Amazon are exceptionally well positioned to benefit from the ongoing AI revolution, regardless of short-term cost concerns or economic headwinds. Nvidia's innovation engine and market dominance in AI chips make it a cornerstone of the AI ecosystem. Amazon's diverse AI strategy, spanning e-commerce, cloud services, and consumer devices, provides multiple avenues for growth and value creation. So, despite the ongoing volatility in these names, I plan to start buying them aggressively over the next two years. However, if you want exposure to this theme without buying individual stocks, there are several exchange-traded funds (ETFs) available that focus on AI and machine learning. Most of these ETFs own a significant number of Nvidia and Amazon shares.

AI Stock Sell-Off: 3 Tech Stocks to Buy Now | The Motley Fool

AI stock prices are suddenly falling. Here's how to take advantage of the sell-off. Just a few weeks after the Nasdaq Composite reached a new record high, tech investors are suddenly singing a different tune. The tech-heavy index is now down more than 8% from its peak on a combination of concerns that valuations are stretched after the earlier surge, doubts about the near-term monetization of AI, and a rotation to small-cap stocks, which have underperformed, in anticipation of interest rate cuts from the Fed. Despite the sell-off, many of the AI stocks that have reported quarterly results thus far this earnings season have delivered solid numbers even though market sentiment seems to be shifting against them. On that note, let's take a look at three AI stocks worth buying as prices come down. Taiwan Semiconductor (TSM -5.26%), or TSMC, as it's also known, is a linchpin of the global economy. It is by far the largest contract manufacturer of semiconductors in the world, handling production for companies like Nvidia, Apple, Broadcom, Advanced Micro Devices, and others. Taiwan Semi stock is now down 20% from its peak a few weeks ago even though the company delivered an impressive second-quarter earnings report in mid-July. Second-quarter revenue jumped 40%, or 33% in dollars, to $20.8 billion, and earnings per share rose 36%. TSMC is benefiting from both the broader cyclical recovery in the chip sector and increasing demand for AI and advanced chips. Advanced technologies, defined as 7-nanometer chips or smaller, made up 67% of total wafer revenue in the quarter. Due to its dominant market share in third-party chip manufacturing, advanced technologies, and customer relationships, TSMC has formidable competitive advantages, and it should be a winner no matter what happens with AI chips. The stock also looks reasonably priced at a price-to-earnings ratio of about 30, which looks like a great price considering its current growth rate. Like TSMC, Google parent Alphabet (GOOG -2.35%) (GOOGL -2.40%) stock pulled back after the company's latest earnings report even as the search giant topped estimates on the top and bottom lines. Instead, investors were disappointed with slower-than-expected revenue growth at YouTube and concerned about an increase in capital expenditure to build out the company's AI infrastructure. However, Alphabet's results were strong. It showed 14% revenue growth to $84.7 billion, and earnings per share rose from $1.44 to $1.89. Alphabet is executing well across its business. It's controlling headcount growth to drive expanding operating margins. It's now reporting strong profits in Google Cloud, where it was losing money only a little more than a year ago. And it has kept pace in the AI race with OpenAI and others, deploying the new Gemini chatbot and an AI assistant in search. Meanwhile, its Waymo autonomous vehicle subsidiary is the leader in that emerging technology. You might think Alphabet would trade at a premium to the S&P 500, given its growth rate and potential in new technologies. But at the time of writing, the stock trades at a price-to-earnings ratio of 24.4, a great price to pay for a proven winner. Super Micro Computer (SMCI -7.08%) peaked back in March when the company was selected to join the S&P 500, but its share price has drifted lower since then after surging early in the year and late last year. The stock is down 46% from that peak, and it appears to be oversold pending its upcoming fiscal-fourth-quarter earnings report on August 6. Supermicro, as the company is also called, might be the fastest-growing AI stock after Nvidia. In its most recent quarter, the company reported revenue growth of 201%, and adjusted earnings per share more than quadrupled year over year. The company makes high-density servers that work especially well for running AI applications, which has driven its growth over the last year. It also enjoys a close relationship with Nvidia, enabling it to get needed supplies of GPUs and other components. Despite its skyrocketing growth rate, Supermicro's valuation looks relatively modest at a P/E of around 37, and analysts expect the blistering growth to continue. If the company can deliver strong results in its upcoming earnings report, the stock could bounce up from its current level.

Nvidia, Microsoft, or Apple: Which $3 Trillion-Dollar Stock Is the Better Artificial Intelligence (AI) Play? | The Motley Fool

While the current buzzword for the hottest tech stocks might be the "Magnificent Seven," that could soon turn into the Terrific Three. Nvidia (NVDA -1.78%), Microsoft (MSFT -2.07%), and Apple (AAPL 0.69%) have put a considerable amount of daylight between themselves and the remainder of the Magnificent Seven, which includes Alphabet, Amazon, Meta Platforms, and Tesla. Nvidia, Microsoft, and Apple all have market caps in the range of $3 trillion, and all are among the leaders in the AI revolution in different ways. Nvidia is the leading chipmaker, building the AI infrastructure that is powering new large language models and applications like ChatGPT. More than any other company, Nvidia has defined the current AI era, and its stock has been the biggest gainer based on market cap. Microsoft has established itself as a leader in AI applications thanks to its partnership with OpenAI. Microsoft has invested an estimated $13 billion in the ChatGPT maker, and it has forged a close partnership with OpenAI, which has allowed it to deploy ChatGPT across a wide range of products, including Azure, its Office suite, GitHub, and Bing, and the AI-based Copilot, as well as other AI tools already driving meaningful growth for Microsoft. Finally, Apple has been somewhat late to the AI party, but the iPhone maker can't be ignored when it comes to a new technology like AI. That's because Apple has an installed base of active devices of 2.2 billion, meaning that it controls the connectivity to AI for billions of users. Apple is also releasing Apple Intelligence, a suite of AI tools like a writing assistant, which is expected to be available to consumers shortly. As the descriptions show, all three of these companies have their own strengths in AI, and all three stocks have outperformed the S&P 500 in the AI era. However, Nvidia has been the clear winner during that time, as the chart below shows. NVDA data by YCharts. Nvidia is also the most expensive stock of the three based on its trailing price-to-earnings ratio, which is currently 65, compared to Microsoft at 37 and Apple at 33. However, Nvidia is also the fastest-growing of the three stocks and is expected to grow revenue by 98% this year, compared to Microsoft at 16% and Apple at 8%. Because of that, Nvidia' forward P/E is much lower, at just 40, bringing it more in line with that of Microsoft and Apple. Of the three stocks, Nvidia's future is the most closely tied to AI. Its revenue more than tripled over its last four quarters as it's become the de facto supplier of GPUs and other components needed for AI infrastructure. Nvidia's also moving fast to release new products and stay on the cutting edge of AI and ahead of the competition. The company just announced a suite of services and computing platforms to help build the next generation of humanoid robots. Additionally, the company recently launched its new Blackwell platform, which can process trillion-parameter large language models at as much as 25 times less cost and energy than Nvidia's previous Hopper architecture. Nvidia has executed nearly perfectly since the beginning of the generative AI era, and the company looks like a good bet to continue to dominate the market for AI hardware. While Microsoft and Apple both have their own strengths in AI, they don't have the same level of exposure to AI that Nvidia does, and they haven't demonstrated the same ability to develop new AI technology. If you're bullish on AI, Nvidia looks like the best stock of the three to own today.

Is Nvidia Stock a Buy Now? | The Motley Fool

The AI chip market leader may not be as dominant as initially thought. AI market darling Nvidia (NVDA -1.78%) has cooled off, dropping roughly 15% since peaking at a $3.3 trillion market cap just a few weeks ago. Despite the recent stumble, the stock has gained over 100% over the past year. Volatility is normal for any stock that rises so much in a short amount of time. But Nvidia's current dip isn't an automatic buying opportunity. Question marks are starting to pile up as the company prepares to announce second-quarter earnings in a few weeks. Here are the risks investors should consider before buying the stock today. The artificial intelligence (AI) race began in early 2023 with the viral arrival of ChatGPT. Nvidia's GPUs, which can optimize for AI applications using proprietary software, quickly established a dominant market share. Industry estimates have pegged Nvidia's AI market share as high as 70% to 95%. Research from TechInsights estimates Nvidia accounted for 98% of total data center GPU revenue in 2023. Nvidia's financials back that up; revenue growth accelerated to nearly 300%. Technology CEOs like Elon Musk openly pleaded they couldn't get Nvidia's chips fast enough. Such high demand has done wonders for Nvidia's pricing power, too. Gross profit margins have expanded significantly to over 75%: But it's hard staying on top when everyone is coming for your crown, and many of these big chip spenders may not enjoy being at Nvidia's mercy. It's known that competitors like Intel and AMD are pushing alternatives, and big technology companies like Amazon, Alphabet, and Meta Platforms are building custom AI chips. Alphabet may have struck the first known blow to Nvidia's dominance. Apple (AAPL 0.69%) recently disclosed that it used 2,048 of Alphabet's TPU v5p chips to build the AI that will run on iOS devices. For its server AI model, Apple deployed 8,192 TPU v4 processors. These tensor processing units (TPUs) are purpose-built to train AI models. Apple didn't say it didn't use Nvidia chips, but omitted Nvidia when describing its hardware and software build. Apple's tie-up with Alphabet is significant for multiple reasons. First, Apple's AI project is critically important, and the company chose Alphabet's chips despite the perception that Nvidia was the de facto industry leader and go-to chip vendor. It's just one instance, but it's now fair to question whether Nvidia's AI moat is as wide as initially thought. Second, analysts' revenue estimates remain very optimistic despite potential competitive pressure. You can see that estimates for 2024 and 2025 are as high as ever: Third, genuine competitive pressures would likely threaten Nvidia's gross profit margins, which (as you saw in the first chart) have expanded beyond 75%. Over the past five years, Nvidia's gross margins have averaged 63%. Even if Nvidia retains the lion's share of the AI chip market, it may no longer do so at any price. Prices may have to come down to compete. The potential downside in both revenue and gross margins should concern investors. I'm not saying that Nvidia can't or won't remain the leading AI chip company. But it's becoming increasingly plausible that deep-pocketed competitors can win business. Many of these big technology companies building custom AI chips are currently Nvidia's largest customers! Maybe the broader demand for AI chips will be so great that Nvidia can grow while ceding some of its market share. The risk is that it can't, that Nvidia's AI revenue could peak and then moderate or even decline as other AI chips flood the market. Q2 earnings could easily be another blowout quarter. Investors will want to pay close attention to management's full-year guidance, which should reveal future sales momentum. Nvidia could prove volatile as Wall Street chews on these questions. Investors may want to consider waiting to see how Q2 earnings look before aggressively buying shares. At the very least, consider dollar-cost averaging your Nvidia investments. That's a smart way to manage uncertain markets or falling stock prices. By investing a fixed amount at regular intervals, you can lower your average cost per share over time. This method helps you buy more when prices are low, offering a strategic advantage in volatile markets.

Is the AI Bubble Popping? Don't Be so Sure. | The Motley Fool

AI stocks are falling, but it might be premature to talk about a bubble. Not long after ChatGPT was released, pundits began warning people that an AI bubble was forming. Stocks like Nvidia (NVDA -1.78%) were skyrocketing as tech CEOs and luminaries said that generative AI could be as transformative as the internet. The start of the AI boom was also well-timed for investors as tech stocks were at rock-bottom valuations after tech stocks crashed through 2022 after the pandemic ended. Now, with a number of high-profile AI stocks falling, those same critics are claiming that the AI bubble is here. It's true that tech stocks are falling fast. The Nasdaq-100 or the ETF Invesco QQQ Trust (QQQ -2.37%), composed of the biggest tech stocks on the market, is down 9% from its peak just a few weeks ago as of July 30. It is approaching a market correction, which is defined as a decline of more than 10% from a recent peak. Nvidia, the AI revolution's flagbearer, is now down 26% from its peak in June. Other high-profile AI chip stocks like Arm Holdings, Super Micro Computer, Taiwan Semiconductor, and AMD are also down substantially. Even Alphabet (GOOG -2.35%) (GOOGL -2.40%) and Microsoft (MSFT -2.07%), two of the top AI stocks, both pulled back on their recent earnings reports despite strong results. Clearly, investor sentiment is shifting on these stocks, but does that mean that the AI bubble is already bursting? Let's take a closer look. The traditional definition of a market bubble is the process of an asset's price soaring well beyond its underlying value. Once investors realize the price no longer reflects its value, the price tends to come crashing down. Bubbles form because investors notice a share price moving ever upward and jump on the bandwagon, assuming that they can ride the stock higher and then offload their shares before the stock tumbles. This pattern is known as the greater fool theory, meaning investors buy a stock on the assumption that someone else will be willing to pay a higher price for it. Eventually, of course, someone gets left holding the bag. Some recent examples of market bubbles include the dot-com bubble when internet stocks crashed in 2000 following exponential growth in the prior years. In real estate, the housing bubble in the subprime market helped trigger the financial crisis, and, more recently, tech stocks also experienced a bubble in the aftermath of the pandemic, especially in subsectors like e-commerce, cloud computing, and video streaming, which all surged during in 2020 and 2021. Market bubbles are typically identified by rapidly falling prices after an earlier surge, but there's more to it than that. Bubbles burst because conditions change in the underlying businesses. It's more than just a price movement. For example, when internet stocks crashed in 2000, nearly all of them saw their growth rates stall. Amazon, for example, went from revenue growth of close to 180% in 1999 to just 13% revenue growth in 2001. When the housing market bubble popped, foreclosure rates skyrocketed as it became clear that many homebuyers couldn't afford their mortgages. More recently, in the aftermath of the pandemic, big winners like Zoom and Peloton crashed as the tailwinds that had driven their growth during the pandemic evaporated. Right now, there isn't much evidence that demand for AI is slowing or that there's a fundamental problem with the new technology. Alphabet just reported 14% revenue growth in its second quarter, and 29% growth in Google Cloud, the cloud infrastructure business that has the most AI exposure of any of its units. At Microsoft, revenue rose 15% with 29% growth in Azure, its cloud infrastructure business, which is seen as the best proxy for AI growth. Those are strong growth numbers, especially for companies as big as Alphabet and Microsoft. Rather than the AI bubble bursting, the recent decline in AI stocks seems to be best explained by two factors. First, there's a market correction in AI stock prices. After this year's rally, investors believe the sector may be getting overheated and are selling these stocks and booking profits. Related to this, there are some fears that companies like Microsoft and Alphabet are overspending on AI infrastructure that they may not be able to adequately monetize, but that's likely just a fleeting market mover. Secondly, there's a market rotation happening. Investors are moving money out of large-cap tech stocks like Alphabet, Microsoft, and Nvidia and, anticipating rate cuts from the Federal Reserve, putting it into small-cap stocks, which have badly underperformed in the AI era. You can see from the chart below that the Russell 2000 small-cap index has soared since the Nasdaq-100 peaked on July 10, while the tech-heavy index has steadily fallen. That rotation makes sense. Tech stocks have surged since the start of 2023, while small-cap stocks have been left behind. Small-caps tend to be more sensitive to interest rates than large-caps, meaning they're likely to derive a greater benefit from the expected cuts from the Fed. Based on the current evidence, AI stocks don't appear to be in a bubble, as there would need to be weaker results coming from companies like Alphabet, Microsoft, and Nvidia to make a convincing case that the industry is in that fragile state. While many of these stocks are still expensive, it would be a smart move to keep cash reserved to take advantage if the sell-off continues. The pullbacks at Alphabet and Microsoft, for example, don't seem justified based on their robust quarterly results. Just as it's easy for stocks to get overbought in a rally, we could see many of these AI leaders enter oversold territory if the correction continues.

Forget the "Magnificent Seven:" These 3 Tech Stocks Are Table-Pounding Buys | The Motley Fool

The world's most prominent technology companies, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, dominated the stock market over the past 18 months. This group, dubbed the "Magnificent Seven," collectively generated remarkable investment returns on their way to trillion-dollar market caps. These companies are leading some of the hottest growth trends, including artificial intelligence (AI). However, most have stretched to lofty valuations that diminish their near-term investment upside. Justin Pope (Fiverr International): Wall Street forgot the freelancing marketplace Fiverr International since the lockdown period during the COVID-19 pandemic ended. The stock soared when lockdowns pulled forward blistering growth, then tanked when the economy normalized. Shares lost over 90% from their pandemic peak. The selling has gone way too far. Fiverr's growth slowed, but revenue never declined. In other words, it didn't give up anything it gained during the height of the pandemic: Plus, the company is aggressively shifting from gigs like copywriting or voiceover work to more complex skills it can sell to enterprise customers. Fiverr's customer base is evolving from quantity to quality; active buyers declined 8% year over year in the second quarter, but the spending per buyer increased 10%, which drove total revenue growth. Management expects this trend to continue. Importantly, Fiverr has emphasized that AI technology is a net positive for growth; AI is replacing some simple tasks but creating more opportunities in the complex skills segments Fiverr clients covet. Most importantly, management believes the business will generate substantial free cash flow over the coming years. Fiverr projected that cash flow will grow by 14% annually from 2024 to 2027, creating approximately $300 million in cumulative cash. Analysts believe Fiverr will earn $2.31 per share in 2024, which values the stock at just over 11 times earnings. Assuming earnings can grow as quickly as cash flow, that's a bargain for a company increasing profits at a double-digit rate. Will Healy (The Trade Desk): Investors may not see The Trade Desk as an AI stock at first glance. It bills itself as an "omnichannel platform built for the open internet," serving as a demand-side platform that enables companies and agencies to manage digital ad campaigns. The Trade Desk's is popular because it allows users to run ads at the times and places where the company can gain higher returns from ads. Last year, it brought AI more directly into the process by introducing Kokai. Kokai integrates deep learning algorithms into every aspect of digital media buying. With this technology, users can make better sense of the 13 million ad impressions every second, picking up signals to help media buyers find the best times and places to buy ad impressions. Considering this business's $1 trillion addressable market, its technology could mean considerable opportunities and savings for its clients. Not surprisingly, such products also improve The Trade Desk's finances. In the first three months of 2024, revenue of $491 million rose 28% yearly. This was a significant improvement over the 23% revenue increase in 2023. Thanks to expenses growing at a slower rate, The Trade Desk earned an operating profit, leading to a net income of $32 million, far above the $9 million in the year-ago quarter. Amid these improvements, The Trade Desk is up by more than 240% over the last five years. Although the stock took a massive hit in the 2022 bear market, it has stood out by regaining most of that lost value. Consequently, its price-to-sales (P/S) ratio is now at 22. While that may seem high, it is below the five-year average of 26, increasing the likelihood that more AI-driven gains could still take the stock significantly higher. Jake Lerch (Spotify Technology): My choice is Spotify Technology. The company, which operates the world's most popular music streaming service, continues to post fantastic financial results. In its most recent quarter (the three months ending on June 30, 2024), Spotify generated 3.8 billion euros ($4.1 billion) in revenue, up 20% from a year earlier. Similarly, gross profit reached a new all-time high of 1.1 billion euros ($1.2 billion), which represents a 45% increase from one year ago. Finally, free cash flow for the quarter was 490 million euros ($534 million). That figure has skyrocketed compared to last year, when Spotify generated only 9 million euros ($10 million). What's driving the excellent numbers is continued user growth. Total monthly active users (MAUs) jumped 14% to 626 million. Roughly 39% of those total users are premium subscribers, who pay anywhere from $12 to $20 in the United States. These premium subscribers drive about 88% of the company's total revenue. Crucially, the company beat expectations for premium subscriber growth this quarter, recording a 12% increase in this key category. Yet, despite these solid numbers, it's important to remember that Spotify isn't a stock for every investor or portfolio. The company is still early in its business life cycle, focusing on growth. Its stock pays no dividend and likely will not do so anytime soon. Furthermore, if revenue stalls, profits decrease, or user growth dries up, Spotify's stock could tumble sharply. In other words, Spotify is still a growth stock -- with all the risks that come with one.