On the heels of the worst market performance in more than a decade, the major market indexes have come roaring back so far this year -- and it's only half over. Helping fuel Wall Street's bullish attitude is investor excitement about the latest advances in artificial intelligence (AI). Investors are only just beginning to understand the far-reaching implications of this next-generation technology, which has the potential to drive growth and innovation for much of the coming decade.
These developments have started an "AI gold rush," according to Wedbush analyst Dan Ives. The analyst recently spoke to CNBC and in the interview, he argues that the accelerating adoption of AI is still underappreciated by most investors and could drive a "tidal wave" of growth in the coming months and years. While many companies will profit from the disruption caused by AI, Ives highlighted four of his favorite AI-related stocks to buy now.
Image source: Getty Images.
Unleashing $1 trillion in IT spending
In a note to his clients this week -- and in subsequent interviews about his report -- Ives argues that the combination of high inflation, rising interest rates, and fears of a recession weighed on technology stocks in 2022. However, rising sentiment fueled by AI boosted big tech so far this year -- and it could be just the beginning. He told CNBC he expects a "much broader tech rally" over the coming six months, with stocks growing by an additional 12% to 15%, on average, in the second half of the year.
Ives further argues that the combination of workforce reductions, cost-cutting measures, and improved inventory levels positioned many technology companies to reap the benefits from an "incremental $1 trillion in IT spending," which will not only drive accelerating growth but also margin expansion, leading to greater profits.
Ives, in his investor note, highlights four companies that he believes are well-positioned to profit from the resurgence in tech and the rise of AI -- and they're among his favorites.
Biggest is sometimes best
Apple's (AAPL 0.15%) recent debut of its Vision Pro mixed-reality headset was met with head-scratching by Wall Street, but Ives said he believes this is the first step in a "generative AI-driven app ecosystem" for its installed base of more than 2 billion active devices, which includes roughly 1 billion iPhones.
But there's more to Apple than just AI. Recent macroeconomic conditions suggest there's likely pent-up demand for the soon-to-be-released iPhone 15. There are an estimated 250 million iPhones that haven't been replaced over the past four years, which could fuel a vibrant upgrade cycle. Furthermore, with a greater number of buyers opting for premium models, the average selling price (ASP) is rising. The combination of these factors will increase revenue and boost Apple's stock price. In fact, Ives makes the case that Apple's market cap could top $3.5 trillion to $4 trillion over the coming 18 to 24 months.
Then, there's Microsoft (MSFT 1.44%) and Alphabet (GOOGL 1.77%) (GOOG 1.77%). In many ways, these two companies are the poster children for early attempts to integrate generative AI. Microsoft spent a cool $13 billion for a sizable stake in ChatGPT creator OpenAI and quickly integrated the tech into its Bing search engine. Alphabet responded in kind, debuting its chatbot Bard, which initially met with lukewarm reviews. The company has since provided a more robust response, detailing how it plans to integrate AI into a broad cross-section of its products and services.
Both companies are top-tier players in cloud computing, while Alphabet dominates search and digital advertising, and Microsoft is an undisputed leader in enterprise software -- each of which can be improved with AI. Furthermore, in addition to their existing flagship products and services, AI represents the next big growth and profit opportunity for these tech stalwarts.
Finally, no discussion about AI would be complete without a nod to Nvidia (NVDA 3.48%). The company developed the semiconductors that had the necessary computational horsepower, which led directly to the recent advances in AI. Not only does the company boast an estimated 95% share of the machine learning chip market, but management is guiding for revenue of $11 billion in the current quarter, which represents growth of 64% year over year and 53%, sequentially.
To buy or not to buy?
There's been a lot of debate over the past several months regarding the climbing (and in some cases, soaring) valuations among the trendy tech stocks. Bulls insist that this is just the beginning and that significant increases in revenue and ultimately profits will quickly justify the lofty price tags. Bears, on the other hand, suggest that buying at these pricey multiples is a recipe for trouble, as any of these stocks could experience a significant decline at any time (if you have any doubts about that, see last year).
Much of how an investor approaches this dilemma will depend on their investing style. For price-sensitive investors, the time to buy these stocks may have already passed, though they could certainly wait for a better entry point. For those with a strong constitution and a long investing time horizon, the best time to buy these stocks is probably now.
If Ives is right (and my money says he is), this quartet of tech stocks -- Apple, Microsoft, Alphabet, and Nvidia -- will all be significantly higher a decade from now. That's why I've increased my positions in each stock already this year.
