Finance
According to select Wall Street analysts, there are two AI stocks that need to be bought before they soar to 95%
Invest in artificial intelligence (AI) stocks have been on the rise in recent years. Companies across industries are increasingly turning to advanced AI technologies to generate cost efficiencies and improve productivity and decision-making. Subsequently, many of these companies expect an increase in turnover and profits in the coming years.
Still, stock investors should be cautious about the euphoria surrounding the AI industry. If they want to benefit substantially from this secular trend, they should focus on AI-powered companies with sustainable competitive advantages and robust financials. There are two such companies Advanced micro devices (NASDAQ: AMD) And Nvidia (NASDAQ: NVDA).
This is why market analysts expect these companies to demonstrate exceptional AI stock picks over the long term.
Advanced Micro Devices: Predicted Upside Potential of 76%
Chip designer Advanced Micro Devices reported impressive second-quarter data, with revenue and profit exceeding consensus analyst expectations. The analysts also liked the third-quarter 2024 revenue guidance and higher full-year revenue outlook for the data center AI chips segment. Melius Research analyst Ben Reitzes set a very bullish $265 price target for AMD stock. The target implies an upside potential of 76% in the coming years.
Nvidia is the undisputed leader in the data center AI market. AMD is working hard to capture a significant share of this high-margin market with its competitively priced and fast-growing AI chip portfolio. The company integrated high-bandwidth memory capacity into its new Instinct MI300 GPUs, making them well-suited for AI inference workloads. AMD reported quarterly sales of the MI300 surpassed $1 billion for the first time in the second quarter. AMD has also significantly improved its ROCm software stack to support its hardware, making it easier for customers to train AI models on its platform.
AMD is also gearing up to launch new AI accelerators with higher memory capacity and computing performance, such as the MI325X series later in 2024, the MI350 series in 2025, and the MI400 series in 2026. The recent acquisition of ZT System worth $4.9 billion, a major The provider of AI infrastructure for hyperscalers is expected to strengthen the company’s entry into the fast-growing AI market. The company also acquired Silo AI, the largest private AI lab in Europe, to gain access to top talent in the AI industry.
Elsewhere, AMD already enjoys a strong presence in the global CPU market. The company is already seeing robust adoption of its fourth-generation EPYC server CPUs by cloud providers and large enterprises. The company also plans to launch fifth-generation EPYC processors in the second half of 2024. AMD accounted for a 24.1% unit share and 33.7% revenue share of the data center CPU market in Q2 2024.
AMD’s gross margins were 53% in the second quarter, up 340 basis points year over year. The company expects its margins to continue to grow in the coming quarters, in tandem with its increasing share of the AI market.
AMD stock is trading at 10.9 times its trailing-twelve-month sales, which is higher than its five-year average price-to-sales (P/S) ratio of 9.2. However, given the rapidly growing presence in the data center and server CPU markets and improving margins, the premium valuation seems justified. So the stock could prove to be an attractive choice even at current high price levels.
Nvidia: predicted upside potential of 95%
Shares of semiconductor giant Nvidia, a darling of the stock market, are up 159% so far in 2024. Still, according to hedge fund manager Eric Jackson of EMJ Capital, the stock could reach $250 per share by the end of 2024, implying upside potential. of 95%. Jackson bases his claims on the fact that (until recently) Nvidia’s price-to-earnings ratio was lower than the average price-to-earnings ratio of the past five years. Over the past five years, Nvidia’s price/earnings ratio has topped 50 three times and hovered around 70 twice. Given Nvidia’s projected growth potential in 2025 and 2026, investor euphoria is likely to push valuation levels closer to these peak levels in the coming months to take.
While Jackson’s forecast seems overtly optimistic, investors’ optimism about the company is justified. Nvidia accounted for 92% of the US data center GPU market in early 2024 and 65% of the global data center AI chips market in 2023. The company’s full-stack platform approach, which provides a complete ecosystem of AI-optimized hardware chips and software systems , networking solutions and development frameworks, strengthens and expands its reach in the AI and high-performance computing markets. Moreover, there are strategic partnerships with technology titans such as Metaplatforms, AmazonAnd Microsoft also play a critical role in driving demand for the company’s advanced chips and networking components in areas such as data centers, healthcare, social media and autonomous driving.
Nvidia has significant pricing power for its AI chips, allowing the company to report impressive gross margins. The company’s flagship H100 chip is currently selling for $25,000 per unit. Nvidia can also command higher prices for its next-generation H200 and Blackwell architecture chips, thanks to superior technology capabilities and the ongoing supply crunch. So, the company’s profit margins may remain high in the coming quarters.
Considering all these factors, acquiring at least a small stake in Nvidia stock now could be a smart move.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
According to select Wall Street analysts, there are two AI stocks that need to be bought before they soar to 95% was originally published by The Motley Fool
