Is the AI stock market boom still going strong, or is it losing steam? Leading AI stocks like Microsoft (MSFT) and Nvidia (NVDA) are facing sky-high expectations. For companies like Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META), the rise of generative AI presents both significant risks and opportunities.
With the emergence of generative AI—capable of creating text, images, and video—there’s reason to be cautious amid the excitement. Many companies are now promoting AI-focused product roadmaps. Investors should look for AI stocks that leverage artificial intelligence to improve products or gain a competitive edge.
So far, semiconductor companies have outperformed software firms as the leading AI investments.
Palantir Among Top AI Stocks
Many software companies are still figuring out how to monetize their AI products. One of the challenges is how quickly customers move from pilot programs to full-scale deployment.
Software companies that have struggled to generate revenue from “copilot” tools are now turning to AI agents. In cybersecurity, AI agents are being actively developed.
“The difference is that copilots assist, while agents take action,” said Palo Alto Networks (PANW) CEO Nikesh Arora in an interview with IBD.
Meanwhile, data analytics software company Palantir (PLTR) has defied the trend of chipmakers dominating the AI market. Palantir’s stock has surged 153% this year.
Microsoft also continues to be a major player in AI, as the largest investor in OpenAI, the leader in generative AI.
Key Issues for Leading AI Stocks
OpenAI recently raised $6.6 billion in new funding, valuing the company at $157 billion, up from $86 billion earlier this year. This funding round was led by Thrive Capital, with additional investments from Microsoft, SoftBank, and Nvidia, but not Apple (AAPL), despite rumors.
OpenAI is transitioning from a nonprofit to a for-profit model as top researchers leave. The company has also released a new language model, OpenAI o1, code-named “Strawberry,” which offers improved reasoning capabilities but is more expensive to run than GPT-4.
Apple remains a key AI stock to watch, with its stock up 18% in 2024. The big question is whether the AI features in the iPhone 16 will drive a significant upgrade cycle.
Nvidia continues to be a bellwether for AI stocks, with its stock climbing 172% in 2024 after a 239% rise last year. Nvidia remains on the IBD Leaderboard, with production ramping up for its next-gen Blackwell AI chips in 2025.
AI Stocks Enter a ‘Show Me’ Phase
The top AI stocks span chipmakers, software companies, cloud service providers, and tech giants. Capital spending on AI infrastructure surged in Q2 2024 among Amazon, Microsoft, and Google, but now investors are watching closely to see how much revenue these investments will generate.
“We expect AI to shift from a ‘tell me’ to a ‘show me’ narrative, with increased scrutiny on the gap between investments and revenue generation,” said a Bank of America report.
Meta is another AI stock to watch, with its stock up 66% in 2024. Meta recently launched AI Studio, which helps businesses build custom AI agents.
Nvidia and Arista Networks (ANET) are also competing in the AI Ethernet networking space, with Arista’s stock up 77% this year.
AI Stocks: Monetizing Software a Challenge
So far, the strongest demand for AI chips has come from cloud computing and internet companies. Broadcom (AVGO), Qualcomm (QCOM), ARM Holdings (ARM), and Marvell Technologies (MRVL) are also key AI chipmakers, with Broadcom and Marvell developing custom AI chips for cloud providers.
For many application software companies, figuring out how to charge for AI-related products remains a challenge. Analysts predict that most enterprise software companies won’t monetize generative AI, or “conversational AI,” in a meaningful way until late 2025. Many U.S. companies are focusing on custom AI software projects that will take longer to commercialize.
AI technology relies on advanced algorithms designed to mimic human learning, pattern recognition, and predictive capabilities. While early AI models primarily focused on data-driven predictions, new generative AI models respond to user prompts to create text, images, video, and even computer code.
Companies are looking to boost productivity by developing customized AI solutions for specific industries, using proprietary data to train AI models. AI systems require immense computing power to analyze patterns and make inferences from massive datasets. The race is on to build AI chips for a wide range of applications, including data centers, autonomous vehicles, robotics, smartphones, and more.
AI Stocks To Watch By Industry Group
| Company | Symbol | Comp Rating | Industry name | AI angle |
|---|---|---|---|---|
| Nvidia | (NVDA) | 99 | Elec-Semiconductor Fabless | Cloud computing giants buying more chips to train AI models or run AI workloads. Big lead over rival Advanced Micro Devices (AMD). |
| CrowdStrike | (CRWD) | 90 | Computer Software-Security | AI chatbots expected to automate more functions in security-operations centers and reduce the time to detect computer hacking. |
| Arista Networks | (ANET) | 99 | Computer-Networking | Sells computer network switches that speed up communications among racks of computer servers packed into “hyperscale” data centers. With AI growth, internet data centers will need more network bandwidth. |
| Microsoft | (MSFT) | 65 | Computer Software-Desktop | Biggest investor in generative AI startup Open AI, whose ChatGPT users require Azure cloud services. Microsoft’s business AI assistant, Office 365 Copilot, will have general availability on Nov. 1. |
| Salesforce | (CRM) | 93 | Computer Software-Enterprise | Integrating conversational AI assistants within the user interfaces of all Salesforce apps. Expected to use a mix of subscription and consumption-based pricing. |
| Amazon.com | (AMZN) | 92 | Retail-Internet | Alexa smart assistant lags in chatbot technology. Cloud computing unit working with OpenAI rivals Anthropic, Hugging Face and Falcon 40B. |
Will AI Startups Challenge Tech Giants?
Looking ahead, analysts expect a market for “edge AI” — AI processing done on devices rather than in data centers — to emerge.
While training AI models is currently the largest market for chipmakers like Nvidia, the focus is expected to shift to “inferencing,” or running AI applications, in the future.
One key question for investors is whether tech giants will dominate generative AI or if a new wave of startups will lead the way. OpenAI has already told employees it’s on track for $3.4 billion in annual revenue, up from $2 billion in January.
Large language models (LLMs) are the foundation for developing AI applications and help AI systems understand human language. Companies with access to vast datasets hold a competitive advantage in training these models.
AI ETFs to Watch
OpenAI is part of a broader wave of LLM startups, including AI21 Labs, Anthropic, and Cohere. Anthropic recently launched Claude 3, which it claims outperforms OpenAI’s GPT-4.
OpenAI’s dominance could face challenges from open-source LLMs. Musk’s xAI has announced plans to open-source its Grok LLM, releasing the code for public use.
According to ETF.com, there are 41 AI-focused ETFs with $10.9 billion in assets. However, many of these funds have underperformed the S&P 500 due to their exposure to both AI and robotics. The top-performing large AI ETF, Global X Artificial Intelligence & Technology, avoids robotics and focuses on companies like ServiceNow (NOW), IBM (IBM), Alibaba (BABA), Oracle (ORCL), and Meta.
Src: investors.com
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