The artificial intelligence (AI) market has grown significantly in recent years as companies have launched more powerful chips and data-processing algorithms. Yet this nascent market could still grow at a compound annual growth rate (CAGR) of 20.1% between 2022 and 2029, according to Fortune Business Insights, as the underlying technologies continue to improve.
Many AI stocks hit their all-time highs last year but lost their momentum this year as interest rates rose. However, that downturn has also created attractive buying opportunities for investors who can stomach the near-term volatility. So today let's examine three AI stocks that might be gearing for bull runs later this year: Nvidia (NVDA -2.85%), Meta Platforms (META -1.52%), and The Trade Desk (TTD 0.13%).
Nvidia is the world's top producer of discrete GPUs for PCs and data centers. Its GPU sales soared throughout the pandemic as stay-at-home trends fueled more purchases of PCs for remote work and high-end gaming. The lockdown measures also caused people to use more apps and cloud-based services, which drove data centers to install more of its high-end GPUs to process the incoming data with machine learning and AI tools.
Nvidia's revenue and adjusted EPS rose 61% and 78%, respectively, in fiscal 2022 (which ended this January). But this year, analysts expect its revenue and adjusted EPS to grow just 29% and 27%, respectively, as the pandemic-related tailwinds fade away.
As a result, Nvidia's stock declined over 40% this year amid the broader tech sell-off. However, that crash reduced its forward price-to-earnings ratio to 30, which seems fairly reasonable relative to its growth potential.
Nvidia will likely remain a leader in the data center accelerator market, which could expand at a compound annual growth rate (CAGR) of 36.7% from 2021 and 2026, according to Research and Markets. It should also stay far ahead of Advanced Micro Devices (AMD -2.17%) in the PC gaming market, which Mordor Intelligence expects to grow at a CAGR of 8.9% from 2022 to 2027.
Nvidia's stock might remain volatile this year, but I believe it will continue to be one of the market's top AI chip plays for many years to come.
2. Meta Platforms
Meta Platforms serves 3.64 billion people each month across its "family" of four apps: Facebook, Messenger, Instagram, and WhatsApp. That massive audience provides the company with a gold mine of data -- which is then mined by AI algorithms to help companies craft targeted ad campaigns.
Meta's revenue and EPS rose 37% and 36%, respectively, in 2021. But this year, analysts expect its revenue to grow just 8%, and for its EPS to drop 13%.
That slowdown can be attributed to Apple's (AAPL 0.31%) privacy update on iOS, which allowed users to opt out of data-tracking features; stiff competition from ByteDance's TikTok in the short video market; and the billions of dollars in losses at its VR/AR-oriented Reality Labs division.
Those concerns caused Meta's stock price to stumble more than 40% this year, and reduced its forward price-to-earnings ratio to 16. That discount valuation implies Meta will struggle to find new ways to craft targeted ads and continue to cede users to TikTok. But I believe those fears are overblown.
Instead, I believe Meta will find new ways to craft targeted ads with first-party data, and widen its moat against TikTok with Instagram Reels and Facebook Watch. Those efforts will take time and squeeze its near-term margins, but they should eventually pay off and stabilize its growth.
When that finally happens, investors will consider Meta to be a resilient AI-powered advertising play once again.
3. The Trade Desk
As the world's largest demand-side platform (DSP) for digital ads, The Trade Desk helps ad agencies, advertisers, and trade desks bid on programmatic ad inventories and manage their own ad campaigns.
Programmatic ad sales are automated on a self-service platform by machine learning and AI algorithms instead of human sales teams. These AI-powered ads are then sold through real-time auctions that occur as a visitor visits a mobile app, website, or a connected TV (CTV) platform.
The Trade Desk's revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 43% and 77%, respectively, in 2021 as its ad sales accelerated in a post-lockdown market. Most of that growth was driven by its CTV business, which is profiting from the death of linear TV platforms amidst the growth of streaming services.
Analysts expect The Trade Desk's revenue and adjusted EBITDA to grow 33% and 23%, respectively, this year, as its post-lockdown recovery continues. That outlook is strong, but its stock remains down more than 40% for the year.
The Trade Desk's stock still isn't cheap at 46 times this year's adjusted EBITDA, but I believe it remains one of the best long-term plays on programmatic ads and the growing CTV market.