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How to play the AI tech rally? Here’s five top stocks in the space

Here’s some of the stocks to watch that are currently dominating developments in artificial intelligence

zf L via Getty Images

Investors continue to flock to technology firms investing in artificial intelligence (AI) with the hype further steering market sentiment in the direction of particular stocks which are already making headlines in the sector.

“Whatever your view on Artificial Intelligence, it has certainly captured the media’s attention and more companies with exposure to AI are significantly gaining in anticipation that it will lead to productivity breakthroughs and benefits for society as a whole,” Giles Coghlan, chief market analyst consulting for HYCM, told Yahoo Finance.

Coghlan also noted, however, that the issue with any technology as fundamental as the creation of the computer, the internet, or the mobile phone, it that it is almost inevitable that it will lead to a bubble.

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“While all of these innovations changed the world, early-stage speculations led to huge booms and painful bursts to get there – the challenge for investors is distinguishing the companies that will continue to succeed from those that could end up going bust.”

As a result, he said one potential solution for investors is investing in already top performing firms that have AI exposure.

Here are five of the companies currently dominating the AI space.

Nvidia (NVDA)

The US computer chip designer has become one of the biggest winners of the AI boom, with its stock now worth triple what it was eight months ago.

"Investors have been particularly enthusiastic about Nvidia’s prospects of late, with stocks soaring more than 110% to date and earnings revised significantly higher, largely due to the fact that its graphics processing units are suited for running AI app," Coghlan noted.

Nvidia’s graphics processing units, or GPUs, are critical to generative AI platforms like OpenAI’s ChatGPT and Google’s Bard, making the company a key supplier for companies trying to build something with AI.

“We view Nvidia as the most important company on the planet in an era that is rapidly changing towards one that will be emphasised by greater AI capabilities,” CFRA research analyst, Angelo Zino, said.

The last quarterly earnings report from Nvidia noted over $2bn in profit in three months. Significantly, Nvidia forecast $11bn in sales for the second quarter of fiscal 2024 alone.

Read more: Renewable energy stocks: clean energy switch could benefit these companies

Matt Britzman, equity analyst at Hargreaves Lansdown, told Yahoo Finance that Nvidia is arguably the most high-profile benefactor of the recent AI craze, briefly joining the $1trn market cap club after a massive first quarter that shocked markets.

“Nvidia has long been a leading player in the chip business, traditionally making graphics cards for gaming. But the AI revolution has revealed a new use, and it's much more lucrative. Amped-up versions of its chips are essential for powering AI and machine learning systems – ChatGPT, a popular example, runs on Nvidia chips. These next few quarters will be vital, if competitors don't get their acts together, we could quickly see Nvidia build somewhat of a monopoly in this segment, and that's what investors are hoping for,” he said.

Microsoft (MSFT)

When it comes to generative AI, Microsoft is also dominating the conversation after pouring billions into ChatGPT developer OpenAI. The company is adding the technology to everything from its Dynamics 365 to Office 365, and also to Bing. Microsoft is also bringing generative AI to its cybersecurity offerings via its Microsoft Security Copilot.

It's all part of the company’s strategy to ensure that when it comes to the latest generation of AI, it’s Microsoft that you think of first.

Read more: Microsoft is dominating the AI wars…for now

“For Microsoft, the benefits of AI are broad and should help to offset weakness in other areas like personal computing, which is likely to continue struggling given the pressures on consumers at the minute,” Matt Britzman said.

“But the purchase of OpenAI opened a new avenue to integrating this technology into the existing office suite of exceptional tools – the result should be broader appeal and pricing dynamics. There should also be benefits for the cloud business as demand for computing power picks up pace,” the equity analyst at Hargreaves Lansdown also told Yahoo Finance.

Microsoft stock has jumped nearly 40% this year thanks to investor confidence in the group.

The tech giant is also well positioned to become a bigger force in the gaming market with it recently clearing a key hurdle by winning EU approval to acquire Activision Blizzard.

Alphabet (GOOGL)

A head start, however, doesn’t mean that Microsoft will stay in the lead forever. Google parent Alphabet (GOOG, GOOGL) is making big bets of its own, while Facebook parent Meta (META) is building a team of engineers to focus on the generative AI space.

For Alphabet, it has several avenues for AI integration, which Matt Britzman also highlighted to Yahoo Finance.

“The most obvious is in the core advertising business, where better ad delivery and targeting should boost click-through rates. It'll be interesting to see exactly how Alphabet aims to integrate with search, and we've already seen the launch of an early version of its offering with Bard. But exactly how it can monetise this new way of accessing information without cannibalising existing revenue streams from Google search remains a question – no doubt they'll figure it out,” he said.

Britzman also noted that its cloud offering is another benefactor, recently reaching profitability for the first time with demand for machine learning capabilities on the rise.

“That's a big milestone for the division that's lagged behind offerings from Amazon and Microsoft,” the analyst added.

Alphabet’s share price has soared close to 40% year-to-date with analysts putting it down to its impressive developments in the AI space.

Amazon (AMZN)

AI has also supported Amazon's success in 2023 with its stock soaring more than 45% year-to-date.

Amazon Web Services (AWS) continues to lead as the biggest player in the cloud market. Moreover, it is implementing AI to its further advantage. However, as Matt Britzman also pointed out, AI at Amazon isn't new.

“It's been using AI to predict consumer demand and manage inventory levels in the e-commerce business for some time. The real benefit should be to AWS, arguably the main driver of Amazon's valuation. It's the market leader and offers services to help businesses throughout the entire machine learning adoption journey. Growth's been slowing from its mammoth heights, but with AI integration looking like it'll become a must-have rather than a nice-to-have, there's plenty of room to grow,” he told Yahoo Finance.

One of the new ways the company is introducing AI is in its warehouses. It recently announced plans to use the technology to screen items for damage before shipping orders to customers. It has already enforced the AI at two fulfilment centres and plans to roll out the system at ten more North America and Europe sites.

The company said it found the AI technology to be three times as effective at identifying damage as a warehouse worker.

C3.ai (AI)

The AI software developer has also been expanding its artificial intelligence services with the company’s latest results reflecting that strengthening momentum in its subscription business.

In its recent fourth quarter results, the company beat analyst expectations on the top and bottom lines but offered a forecast that disappointed Wall Street expectations, sending its shares down 15%.

The company posted revenues of $72.4m, more than the $71m expected on an adjusted loss per share of $0.13, less than the $0.17 loss analysts had expected.

C3.ai's full-year revenue outlook, however, appeared to come in shy of Wall Street expectations. The company said it expects revenue for its fiscal year 2024 to be between $295-$320m; data from S&P Global Market Intelligence showed analysts were looking for revenues closer to $321m for the full year.

"We believe it is generally agreed today that the market for enterprise AI applications is substantially larger and growing at a much greater growth rate than experts predicted," the company said in a statement.

"C3 AI has been at the vanguard of the enterprise AI market for over a decade as that market has developed from its roots in IoT, to unsupervised learning, supervised learning, NLP, deep learning, reinforcement learning, and now generative AI."

Despite the assurances, investors weren't impressed with C3.ai's outlook. However, analysts say it remains a key stock in the sector to watch as it continues to play a key role in the AI space. Moreover, since the start of 2023, C3.ai's stock is up a whopping 252%.

Giles Coghlan further noted that while shares in Alphabet, Microsoft, Amazon, C3.ai and Meta have surged this year, he said all bubbles eventually burst.

“There is an argument that these stocks still have room to grow – many of these companies justify the recent run-ups, but others (Nvidia and C3.ai) may have surpassed their near-term growth prospects,” he added.

Other stocks to watch

Naeem Aslam, chief investment officer at Zaye Capital Markets, said Meta (META) and Tesla (TSLA) are two top stocks in the AI space he is watching – and also warned investors to be “extremely careful” and not get carried away by the AI hype.

“Right now, there is no doubt that there is a lot of AI washing taking place which means any company that can add AI to its name is doing that to pump up the valuations.

“For us, the stocks which are trading at a much better valuation are Meta and Tesla; both huge AI players and they have their own AI chips coming which are going to digest much bigger data and more efficiently,” he said.

Watch: Who owns content generated by AI?

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