What happened
The roller coaster continued on Wall Street this week as the broader market remained focused on the ongoing drama in Washington, DC, and continued to pin its hopes on an agreement to raise the debt ceiling amid partisan gridlock.
Another subject that has been attracting quite a bit of attention in recent weeks and months is the current state of artificial intelligence (AI) and recent advancements in generative AI. Many investors have wondered how much of the current zeitgeist is fad and how much is based in reality. Solid results and a stunning forecast from a company that is benefiting from the current trend of AI helped lift other stocks in the sector -- at least initially.
With that as a backdrop, Advanced Micro Devices (AMD 1.33%) surged 10.1% and Alphabet (GOOGL -1.97%) (GOOG -1.96%) climbed 2.9%, while C3.ai (AI -0.85%) fell 2.1% as of 12:26 p.m. ET on Thursday.
A check of all the usual suspects -- regulatory filings, earnings results, and changes to analysts' price targets -- turned up nothing in the way of company-specific news driving these AI stocks higher. This suggests that investors were probably drawn in by how AI affected the quarterly financial results of Nvidia (NVDA 3.71%).
Image source: Getty Images.
So what
The semiconductor specialist reported the results of its fiscal 2024 first quarter (ended April 30), and while many investors expected there to be an impact from the recent mad rush toward AI, they hadn't prepared themselves for the magnitude of the shift. And while Nvidia's results were better than expected, it was the company's blockbuster forecast that caught many by surprise.
Nvidia generated revenue of $7.2 billion, and while that was down 13% year over year, it was an improvement of 19% quarter over quarter, which pointed to a long-awaited recovery for the chipmaker. Its profits were similarly affected, with adjusted earnings per share (EPS) of $1.09, down 20% year over year but improving 24% sequentially. For perspective, analysts' consensus estimates were calling for revenue of $6.5 billion and EPS of $0.92, so Nvidia beat on both the top and bottom lines.
However, Nvidia's forecast for the current quarter was a shocker. Management said it expects revenue of $11 billion in its fiscal second quarter, an increase of 33% year over year. For context, Nvidia's best-ever quarterly performance resulted in revenue of $8.3 billion, so its expectations for the current quarter exceed the company's personal best by a whopping 33%. Furthermore, analysts' consensus estimates were calling for revenue of just $7.28 billion, so Nvidia's guidance topped Wall Street's forecasts by 51%.
Now what
It's easy to see why investors were initially caught up in the frenzy, as Nvidia's robust results and eye-popping forecast made headlines. Furthermore, recent advances in generative AI suggest this could be just the tip of the iceberg in terms of the technology's disruptive potential.
So what does all this have to do with our trio of stocks? And how will they benefit from these advances in AI?
- AMD competes head-to-head with Nvidia in some of the same markets, so its move higher is the most direct correlation. Because AMD makes semiconductors for data centers, cloud computing, and AI, it has a long runway ahead.
- C3.ai offers AI solutions that help large businesses integrate AI applications quickly and easily. Unfortunately, the company is in the midst of revamping its pricing strategy, and it remains to be seen if customers will bite. This also explains why C3.ai stock faded after its initial surge today.
- Alphabet uses AI to help surface relevant content for its Google search and to target its digital advertising. The company also integrates AI functionality across a wide swath of its products and services, from Google Cloud to Android and Pixel phones and everything in between. Falling demand for advertising during the downturn has weighed on its results, but the tide appears to be turning.
It's important to remember that not all companies are created equal. Even though they play in the same sandbox, AMD will still have a tough time measuring up to Nvidia. AMD reported results earlier this month, and the company guided for revenue to decline 20% year over year in the second quarter, in stark contrast to Nvidia's outlook for 33% growth.
Then there's the matter of valuation. C3.ai, AMD, and Alphabet stocks are currently selling for 8 times, 7 times, and 5 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2.
Given its history and current valuation, Alphabet stock is the clearest bargain among the three. Furthermore, its adtech business is recovering, which will no doubt boost the stock.
