As the stock market takes a breather after a year of extraordinary gains, investors are understandably cautious. The Nasdaq Composite (NASDAQINDEX: ^IXIC) notched an impressive 43% increase last year, leaving many to question the sustainability of the current rally. Yet looking back to 1972, in the years following a bear market rebound, the Nasdaq has historically rallied an average of 19%. With the ongoing economic recovery, history suggests that the current market rally may well continue in 2024.
It appears that the emergence of generative AI fueled last year’s market surge. These advanced algorithms were deployed to handle mundane tasks, freeing users for higher-level chores. While AI is still in its nascent stage, there are a couple of standout companies well-positioned to profit from this technological revolution.
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A Bright Star: Microsoft
Microsoft (NASDAQ: MSFT) is a household name, recognized for its Windows PC operating system and Office suite of productivity tools.
Eager to tap into the vast potential of generative AI, Microsoft made a decisive foray by investing $13 billion in ChatGPT creator OpenAI. The company swiftly developed Copilot, an AI-powered assistant aimed at enhancing user productivity by streamlining repetitive, time-consuming tasks.
Microsoft experienced a surge in demand during the “pilot” project, with 40% of the Fortune 100 using Microsoft 365 Copilot during the early access program. With the digital assistant now generally available, the increased demand is also benefiting Azure Cloud, which outpaced its competitors as the fastest-growing major cloud infrastructure provider. The company cited that three percentage points of Azure’s growth was attributed to “AI services.”
Building on strong financials for its fiscal 2024 first quarter, with revenue growing by 13% year-over-year and EPS climbing by 27%, Microsoft is well-poised for a successful 2024, especially considering the improving macroeconomic conditions, the sustained adoption of cloud computing, and the tailwinds from AI.
A Winning Bet: Nvidia
Nvidia (NASDAQ: NVDA) made its mark by pioneering graphics processing units (GPUs) for high-quality imagery in video games. However, CEO Jensen Huang recognized early on that its graphics cards could be adapted for various computational uses, including data centers, cloud computing, and AI.
This strategy has proven successful, with Nvidia’s data center segment, which includes processors used for AI, surpassing the revenue generated by gaming chips. In the fiscal 2024 third quarter, data center revenue represented 80% of Nvidia’s sales, demonstrating a 350% surge in revenue for the segment compared to two years prior. This highlights the increasing demand for AI processors.
Nvidia’s dominance in processors used in data centers is evident — boasting a 95% market share, according to CFRA analyst Angelo Zino. Furthermore, Nvidia controls 95% of the machine learning GPU market, according to New Street Research. With an intensified need for AI processing, data centers are racing to upgrade their systems to meet the stringent demands of AI, presenting significant growth opportunities for Nvidia.
In the third quarter, Nvidia reported record revenue, soaring 206% year-over-year to $18.1 billion, which translated to diluted earnings per share surging by 1,274% to $3.71. Despite these outstanding results and immense growth prospects, Nvidia’s price/earnings-to-growth (PEG) ratio is below 1, indicating that the stock is undervalued.
As for potential investors, the Motley Fool’s Stock Advisor newsletter highlighted Microsoft and Nvidia among the ten best stocks to consider in the current market climate. While the landscape is ever-changing, the evolving AI revolution and the momentum behind these tech giants spark optimism for successful investments in 2024.
