Analysis

3 AI Stocks for the Second Half of 2024

These companies’ AI capabilities could begin to draw more attention as we come closer to the end of the year.

The tech bull market sparked by innovations in generative AI in 2023 continued in the first half of 2024. Even when focusing on tech broadly rather than the industry’s strongest performers, the tech-heavy Nasdaq Composite Index yielded a total return of nearly 19%.

Knowing that, investors may wonder which stocks could lead the way in the second half of the year. While the market offers no guarantees, the last two quarters of the year could be the time when some stocks begin to rise in earnest. In this article, three Motley Fool contributors deliver insights on stocks they believe investors should watch for the remainder of the year.

Alphabet is positioned to leverage its search-market dominance into AI riches

Jake Lerch (Alphabet): My choice is Alphabet (GOOGL -1.76%) (GOOG -1.84%), the parent company of Google. What I really like about Alphabet is that the company combines two of the most critical features of any outstanding stock: potential, best represented by its artificial intelligence (AI) tools, and results, as seen in its consistent financial performance.

Let’s examine its potential first. Regarding AI, the sky is the limit for Alphabet. The company’s latest AI-powered personal assistant, Google Assistant, offers many features to help people accomplish more. Through voice commands alone, users can:

  • Set timers, create lists, and save locations and passwords.
  • Call, text, and read emails aloud.
  • Gather local information, such as weather, traffic, and directions.
  • Answer general questions, such as “how many grams in an ounce” or “what is 18% of $57.”
  • Find and play music, movies, or podcasts.

Moreover, Alphabet can capitalize on its massive user base. As the most-visited website in the world, Google processes over 8.5 billion searches per day — about one for every person on the planet. As such, Alphabet has a significant opportunity to make Google Assistant the preferred AI assistant. This could lead to substantial benefits for Alphabet in the future as it explores ways to monetize Google Assistant through a subscription model where users pay a monthly fee for premium features or an advertising model¬†where companies pay to have their products or services recommended by the assistant.

In the meantime, Alphabet can rely on its already established businesses, such as Google Cloud, YouTube, and Android, to keep “bringing home the bacon.” These businesses show consistent growth and profitability, adding to Alphabet’s overall stability and investment potential.

To sum up, Alphabet could be the AI stock to watch in the back half of 2024 — and beyond. Investors seeking a stock with an unbeatable combination of potential and results would be wise to consider it.

Meta stock isn’t done riding the AI wave

Justin Pope (Meta Platforms): Social media giant Meta Platforms (META -2.95%) has been on a rocket-like trajectory. Shares have risen 45% since January and are up an astonishing 326% since January 2023 when artificial intelligence began picking up steam. In just 18 months, Meta stock created the magnitude of wealth the broader market generally takes decades to achieve. I understand if people feel skeptical that Meta has more in the tank.

Yet, the fundamentals indicate that Meta could ride its current momentum through the latter half of this year. That’s driven primarily by strong operating performance and a stock valuation that’s still borderline cheap. Meta’s core business is advertising to its billions of social media users. Meta impressively still gains users even though so many people already use its apps. Meta’s family of apps, which include Facebook, Instagram, and WhatsApp, grew to 3.24 billion daily active users in the first quarter, a 7% year-over-year jump.

Digital advertising continues to take market share away from older media formats like television and print, so Meta is also enjoying tailwinds there. Meta’s ad volume was up 20% year over year in Q1. Lastly, Meta has started using AI to help companies advertise more efficiently, which helped increase Meta’s price per ad by 6% in Q1. In other words, Meta benefits from multiple variables boosting its primary business.

Investors will need to see how Meta continues to perform in future quarters. Analysts are very optimistic; 2024 earnings-per-share estimates of $20.16 would represent 35.5% growth over 2023. Meanwhile, analysts believe Meta will grow earnings by an average of over 19% annually for the next three to five years. Given that healthy growth outlook, Meta stock remains arguably cheap at a forward price-to-earnings (P/E) ratio of 25.

Meta is a world-class business that experienced severe adversity in 2022. The comeback has created eye-popping returns. While Meta’s meteoric rise means there’s probably far less upside than before, investors shouldn’t jump ship too soon. There is still plenty of wind in its sails.

In the AI chip space, a rising tide could lift AMD

Will Healy (Advanced Micro Devices): Given Nvidia‘s dominance in the AI chip space, potential competitors are easy to dismiss at first glance.

However, according to Allied Market Research, the AI chip industry is expected to grow at a 38% compound annual growth rate (CAGR) through 2032. With Nvidia apparently struggling to meet current demand, it leaves an opening for competitors such as Advanced Micro Devices (AMD 1.72%).

Even though Nvidia leads in the innovation battle, AMD has a history of catching up to and sometimes surpassing its competitors. Moreover, while a Nvidia AI chip costs around $30,000 to $40,000, AMD’s $10,000 to $15,000 semiconductors will likely appeal to customers who are anxious to snap up any AI chips they can find.

More recently, investors largely overlooked AMD as its revenue of $5.5 billion in Q1 2024 grew by only 2% yearly. However, data-center revenue of $2.3 billion rose 80% over the same period. Moreover, it made up 42% of the company’s overall revenue, a level comparable to Nvidia’s percentage of data-center revenue at the end of fiscal 2022 (ended Jan. 30, 2022) of 39%.

Fast forward to fiscal 2025 Q1 (ended April 28), and 87% of Nvidia’s revenue came from its data center segment. With AMD’s aforementioned 80% data-center growth, Nvidia’s recent history shows how AMD could follow in its footsteps as AI chips become its dominant source of revenue.

Also, thanks mostly to AI chips, Nvidia’s revenue grew 262% yearly in that quarter. Although AMD may or may not match that number over time, Nvidia’s recent history describes what could happen to AMD’s revenue growth as its AI chip sales accelerate.

Additionally, AMD holds a significant valuation advantage if looking beyond its misleading P/E ratio of 232. The company currently trades at a price-to-book value ratio of around 4.5. In comparison, Nvidia sells at 63 times its book value. This differential makes AMD stock a relative bargain, giving the stock room to run as the sale of AI chips becomes a more critical revenue stream.

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