Nvidia is part of the artificial intelligence wave of the future, but the recent declines in Nvidia stock have investors scrambling to find the next AI leaders. That new generation may come in the form of AI adjacent plays from sectors like energy, defense and transportation.
"We can look back at the internet, and what you had was the initial infrastructure wave that then led to consumer products," said Matt Caruso, president of Caruso Insights, on Investor's Business Daily's "Investing with IBD" podcast this week.
Audio Version Of Podcast Episode
He says infrastructure providers in the early internet phase gave way to value-add and services providers, generating returns for shareholders as the market entered into the 2000s. Caruso sees a similar parallel with Nvidia stock.
"I think we had wave one," he said. "There's always going to be someone who's new, who's coming to the market, who's going to provide a new angle to make the chips even faster, or what I think is the next stage, we're going to start to see the fruits of all this massive (capital expenditure)."
Additionally, Caruso highlights Palantir stock, Tesla stock and GE Vernova stock as AI adjacent stocks to watch.
The Good In Palantir's Customer Pickiness
Caruso says Palantir stock is emerging as a compelling AI play in the defense field. He cites Palantir's recent contracts with the U.S. Department of Defense as an example of a company with a robust enough business it can be selective about customers.
Meanwhile, Palantir is already showing how to extract real value from using AI, he says. "That really signals that you have a product that brings value," said Caruso. He says Palantir is a potential AI-adjacent investment following the infrastructure groundwork laid out by Nvidia.
Palantir is a volatile stock, but it's been in an uptrend for several months. After an early August earnings report gave shares a boost, Palantir is now pulling back to find support at a rising 21-day line. Palantir holds a best-in-class IBD Composite Rating of 99 and is ranked No. 1 in the Computer Software-Enterprise industry group, according to IBD Research.
Tesla Builds On Chips From Nvidia
Tesla is another company that's taking advantage of the AI infrastructure built by Nvidia. The automaker purchased thousands of chips from Nvidia and is using them in everything from self-driving technology to robotics. Caruso says companies like Tesla are under pressure from investors to create products that build on costly AI infrastructure and turn it into a profit.
Tesla stock is retaking its 50-day line this week as it forges the right side of a new base. Aggressive investors could use this action, along with shares getting above a recent high of 228.22, as an early entry. The stock is ranked No. 3 in the Auto Manufacturers industry group and has an IBD Composite Rating of 67.
Nvidia Demand Boosts This Energetic AI-Adjacent Play
However, GE Vernova is Caruso's surprise AI-adjacent pick. The chips that fueled Nvidia stock's phenomenal run over the last year require immense amounts of power to run, and GE Vernova is now a pure-play energy stock, Caruso says.
He cites GE's split earlier this year into a health care products company, aviation company and most critically, a power company. "Most CEOs just want a bigger company to manage," he said. "If they went out of their way to break up a company and have a smaller kingdom to rule over, it's because they really think it's in the best interest of what the stocks can do."
GE Vernova on Aug. 29 cleared a 190.80 entry point. Shares are currently extended from that entry. The company's stock made its market debut as GEV in March this year after being split from the larger GE group. GEV holds an IBD Composite Rating of 78 and is ranked No. 2 in the IBD Energy-Alternative/Other industry group.
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