Amid rapid AI expansion, the market share of NVIDIA Corporation (NVDA) appears to be on the edge of waning due to concerns regarding slowed revenue growth, regulatory challenges, and overvaluation. Instead, investors could consider buying top AI stocks Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), and Meta Platforms, Inc. (META) for solid returns.
The networking solution provider NVDA reported a flat fourth-quarter revenue of $2.90 billion from its Gaming segment compared to the previous quarter, and its total revenue of $22.10 billion represents a 22% increase from the prior quarter. So, the company’s revenue growth is slowing down, from 88% quarter-over-quarter to 34% to 22%.
In terms of forward non-GAAP P/E, NVDA is trading at 35.27x, 40.4% higher than the industry average of 25.11x. And its forward EV/Sales of 18.91x is considerably higher than the industry average of 2.94x. Given its slowing revenue growth and elevated valuation, waiting for a better entry point in NVDA could be wise.
Nevertheless, the potential of AI is unmatchable, with the technology disrupting various industries, including healthcare, retail, auto, industrial, finance, and more. The innovation fair around AI is still in full swing, with tech giants pouring billions into the technology, nations hoarding the chips required for future AI ambitions, and its unstoppable fever.
ChatGPT, the popular AI chatbot, became the fastest-growing consumer internet application in history, estimated to have reached 100 million active users in just two months after its launch in November 2022.
The artificial intelligence market size is expected to reach $305.90 billion in 2024. The market is anticipated to grow at a CAGR of 15.8% during the forecast period (2024-2030), resulting in a market volume of $738.80 billion by 2030. In global comparison, the United States is expected to be the largest market, with the size expected to reach $106.50 billion in 2024.
The wide prevalence of AI has also led to President Biden issuing a landmark Executive Order to strengthen AI safety and security, protect Americans’ privacy, advance equity and civil rights, stand up for consumers and workers, promote innovation and competition, advance American leadership around the world, and more.
The order also encourages recognizing AI’s enormous promise and deepening the U.S. lead in AI innovation. The order directed increased investment in AI innovation and new efforts to attract and train workers with AI expertise.
Given the industry’s bright prospects, investing in fundamentally strong AI stocks MSFT, GOOGL, and META could be wise this week for substantial returns.
Let’s discuss the fundamentals of these stocks in detail:
Microsoft Corporation (MSFT)
MSFT is a technology giant that develops and supports software, devices, and solutions globally. The company operates through Productivity and Business Processes; Intelligent Cloud; and More Personal Computing segments. Microsoft recently surpassed the $3 trillion market value.
On January 16, 2024, MSFT and Vodafone Group Plc (VOD) signed a 10-year strategic partnership to bring generative AI, digital services, and the cloud to more than 300 million businesses and consumers. Vodafone will invest $1.50 billion over the next ten years in cloud and customer-focused AI services developed in conjunction with Microsoft.
The collaboration intends to transform the customer experience using Microsoft’s generative AI. The strategic partnership will widen M-Pesa to enhance financial inclusion across Africa. Also, Vodafone will accelerate digital transformation and operational efficiencies in virtual data center migration to Microsoft Azure.
On January 11, MSFT announced new generative AI and data solutions and capabilities for retailers that encompass the retail shopper journey, from enabling personalized shopping experiences, empowering store associates, and unlocking and unifying retail data to helping brands more effectively reach their audiences.
The new solutions offer more options for retailers to choose from to infuse copilot experiences throughout the shopper journey. The industry-specific retail data solutions in Microsoft Fabric allow retailers to unlock insights and lay the foundation for AI.
MSFT’s trailing-12-month gross profit margin and EBITDA margin of 69.81% and 52.04% are 42% and 459.9% higher than the respective industry averages of 49.15% and 9.29%. Likewise, the stock’s net income margin of 36.27% is significantly higher than the 2.68% industry average.
In the fiscal 2024 second quarter that ended December 31, 2023, MSFT’s revenues increased 17.6% year-over-year to $62.02 billion. Its operating income grew 32.5% year-over-year to $27.03 billion. The company’s net income and EPS came in at $21.87 billion and $2.93, indicating growth of 33.1% and 33.2% from the previous year’s quarter.
Street expects MSFT’s revenue to increase 15.1% year-over-year to $60.86 billion for the third quarter (ending March 2024). The company’s EPS for the same quarter is expected to grow 15.5% year-over-year to $2.83. Also, Microsoft topped the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
MSFT’s stock gained 24.4% over the past six months and 61.5% over the past year to close the last trading session at $414.92.
MSFT’s robust outlook is reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Stability and Quality. MSFT has ranked #17 among the 44 stocks in the B-rated Software - Business industry.
Click here to access additional MSFT ratings for Value, Growth, Momentum, and Sentiment.
Alphabet Inc. (GOOGL)
With a market cap of $1.66 trillion, GOOGL provides various tech products and platforms internationally. The company operates through Google Services; Google Cloud; and Other Bets segments. It offers products and services, including ads, Android, Chrome, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
On February 6, GOOGL introduced an experimental conversational AI service known as Bard, powered by LaMDA. It was opened to trusted testers before being made more widely available to the public in the future. Bard combines the world’s knowledge with the power, intelligence, and creativity of the large language models (LLMs).
On November 7, 2023, Google Cloud expanded its partnership with VMware, Inc. (VMW) to deliver Google Cloud’s AlloyDB Omni database on VMware Cloud Foundation, starting with on-premises private clouds. The powerful combination of AlloyDB Omni will enable enterprises to modernize their more demanding databases and applications.
Enterprises can deploy and operationalize Google Cloud’s AlloyDB Omni on VMware Cloud Foundation and simplify their management of PostgreSQL, modernize their existing databases, and help accelerate their Al journey with a powerful, proven platform for building transformative generative AI applications.
GOOGL’s trailing-12-month net income and EBITDA margins of 24.01% and 32.59% are 753% and 74% higher than the respective industry averages of 2.81% and 18.73%. Also, the stock’s trailing-12-month gross profit margin of 56.94% is 16.1% higher than the industry average of 49.04%.
During the fourth quarter ended December 31, 2023, GOOGL’s revenues increased 13.5% year-over-year to $86.31 billion. Its income from operations grew 30.5% from the year-ago value to $23.70 billion. Its net income was $20.69 billion, up 51.8% from the prior year’s quarter.
In addition, the company’s earnings per share of Class A, Class B, and Class C stock came in at $1.64, a 56.2% increase year-over-year. Its cash and cash equivalents stood at $24.05 billion as of December 31, 2023, versus $21.88 billion as of December 31, 2022.
Street expects GOOGL’s revenue for the first quarter (ending March 2024) to increase 12.7% year-over-year to $78.68 billion, and its EPS is expected to grow 28.1% year-over-year to $1.50. Moreover, the company has surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
GOOGL’s shares have gained 40.2% over the past year to close the last trading session at $133.30.
GOOGL’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has a B grade for Sentiment and Quality. Within the B-rated Internet industry, GOOGL is ranked #4 out of 51 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see GOOGL’s ratings for Growth, Value, Stability, and Momentum here.
Meta Platforms, Inc. (META)
META engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. The company operates in two segments: Family of Apps and Reality Labs.
In January 2024, META CEO Mark Zuckerberg announced that the company plans to build its own artificial general intelligence, known as AGI, which is artificial intelligence that meets or exceeds human intelligence in almost every area. He added that Meta further plans to open it up to developers.
In a video posted to Meta’s social network Threads, Zuckerberg said building the best AI for chatbots, creators, and businesses requires enhanced advancement in AI across the board. “Our long term vision is to build general intelligence, open source it responsibly, and make it widely available so everyone can benefit,” he said in a post on Threads.
On February 1, META's board of directors declared a cash dividend of $0.50 per share of their outstanding common stock (including both Class A and Class B common stock), payable on March 26, 2024, to stockholders of record as of the close of business on February 22, 2024. META pays an annual dividend of $0.50, which translates to a yield of 0.10% at the current share price.
During the fourth quarter of 2023, META repurchased $6.32 billion of their Class A common stock in the fourth quarter. In the full year, it repurchased $20.03 billion in stocks of the same class. As of December 31, 2023, META had $30.93 billion available and authorized for repurchases, and they also announced a $50 billion increase in the share repurchase authorization.
META’s trailing-12-month gross profit and EBIT margins of 80.72% and 37.21% are 64.4% and 359.6% higher than the respective industry averages of 49.11% and 8.10%. Similarly, the stock’s trailing-12-month net income margin of 28.98% is considerably higher than the industry average of 3.03%.
For the fourth quarter that ended December 31, 2023, META’s revenue increased 24.7% year-over-year to $40.11 billion. The company’s income from operations grew 156% from the year-ago value to $16.38 billion. Its net income and earnings per share of $14.02 billion and $5.33 indicate growth of 201.3% and 202.8% from the prior year’s quarter, respectively.
Also, the company’s free cash flow increased 117.6% year-over-year to $11.50 billion. Its total assets as of December 31, 2023, were $229.62 billion, compared to $185.73 billion as of December 31, 2022.
Analysts expect META’s revenue and EPS for the first quarter (ending March 2024) to increase 26% and 95.1% year-over-year to $36.09 billion and $4.29, respectively. Furthermore, the company has surpassed the consensus revenue and EPS estimates in all four of the trailing quarters.
Shares of META have surged 66% over the past six months and 169.4% over the past year to close the last trading session at $489.19.
META’s POWR Ratings reflect its promising prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Sentiment. META is ranked #14 among 51 stocks in the B-rated Internet industry.
To access additional META ratings for Growth, Value, Stability, and Momentum, click here.
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MSFT shares fell $414.92 (-100.00%) in premarket trading Tuesday. Year-to-date, MSFT has gained 9.89%, versus a 7.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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