Artificial intelligence (AI) stocks are getting a lot of attention this year thanks to the rapid proliferation of this developing technology that has the potential to significantly boost the global economy. PwC estimates that AI could contribute a whopping $15.7 trillion to the world's annual gross domestic product by 2030.
The key players in this segment saw their stocks rise rapidly in 2023. Nvidia (NVDA 6.18%), for instance, is up 209% so far this year as its chips play a critical role in training and running AI models. Electric vehicle (EV) specialist Tesla (TSLA -1.11%) is expected to be another big beneficiary of AI thanks to the growing autonomy in cars. And Cloudflare (NET 1.44%) is already gaining traction in AI because of its ability to secure and improve the performance of the internet.
Let's take a closer look at the reasons these three AI stocks are worth buying this month.
1. Nvidia
Last month Nvidia released its fiscal 2024 second-quarter results (for the three months ended July 30, 2023), and the numbers show just why it is one of the best AI stocks to buy right now. With a 101% year-over-year jump in revenue to $13.5 billion and a 429% spike in non-GAAP earnings to $2.70 per share, it's clear how great the demand for the company's AI chips is.
The guidance for the current quarter was even better. Nvidia sees $16 billion in revenue in the third quarter, which would translate into a bigger year-over-year jump of 170%. More importantly, this eye-popping growth appears here to stay -- Nvidia management is busy ramping up the supply of its graphics cards and server processors to meet the healthy end-market demand driven by the growing need for AI servers.
Nvidia CFO Colette Kress says that she expects "supply to increase each quarter through next year," and it won't be surprising to see this trend continue in the long run as well. The global demand for AI servers is expected to increase at an annual pace of 22% through 2026, creating the need for more AI chips that Nvidia sells.
Jefferies analyst Mark Lipacis estimates that Nvidia controls a solid 85% of the AI chip market. All the major cloud service providers are on the company's client list, and its focus on entering new niches within the AI chip space suggests that its outstanding growth is here to stay. Not surprisingly, Nvidia's revenue is expected to more than double this fiscal year to $54 billion and jump higher in subsequent years.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
What's more, analysts expect the company's earnings to increase at an annual rate of almost 79% for the next five years. So, investors would do well to buy Nvidia stock before it flies higher thanks to AI.
2. Tesla
Shares of Tesla have more than doubled this year despite the challenges the company faces. The EV specialist was forced to reduce the prices of its cars on multiple occasions in order to sell more units, a move that has pressured its margins. This explains why Tesla's earnings are expected to drop to $3.42 per share in 2023 from $4.07 per share last year.
However, the stock price action indicates that investors and Wall Street are looking beyond Tesla's current challenges. Morgan Stanley, for instance, has upgraded Tesla stock to buy from hold and increased its price target to $400 from $250, citing AI as a big growth driver for the company in the future. The investment bank believes that Tesla's Dojo AI supercomputer could boost its market value by a whopping $600 billion by opening up new markets for the company to tap.
More specifically, Morgan Stanley analyst Adam Jonas said he believes that Tesla can dive into a $10 trillion addressable market with its AI-focused supercomputer, unlocking new growth opportunities such as in self-driving taxis and other connected services arising out of the growing adoption of self-driving cars.
CEO Elon Musk plans to spend $1 billion on building the Dojo supercomputer over the next year, equipping the machine with more than 300,000 graphics cards. That would be way higher than the 6,000 GPUs (graphics processing units) that power its current supercomputer, which means that Dojo is going to have substantially higher computing power. This could allow Tesla to substantially improve the performance of its full self-driving capability, which could increase the demand for a platform that Musk is open to licensing to third parties.
Tesla stock is up more than 10% following Morgan Stanley's latest upgrade, and the firm's ambitious price target indicates that it could head higher. That won't be surprising considering that Tesla is expected to deliver solid revenue growth even during challenging times, and the addition of a new catalyst in the form of AI could amplify the company's growth substantially.
3. Cloudflare
Cloudflare may not be a household name like Nvidia or Tesla, but the company provides critical services that help internet connections function smoothly. More specifically, Cloudflare's massive server network improves the speed, security, and reliability of internet connections. Its cloud-based platform is deployed by a wide number of customers across various verticals such as public and private cloud providers and software-as-a-service (SaaS) companies.
As it turns out, Cloudflare is reportedly used by almost 80% of the websites that rely on content delivery networks or reverse proxy servers. And now, generative AI companies have started adopting Cloudflare's solutions to smoothly reach their customers. CEO Matthew Prince said on the company's August earnings conference call, "One of the fastest growing generative AI companies expanded their relationship with Cloudflare, signing a one-year $1.7 million contract, less than a year after first starting to use our platform."
He added that another generative AI start-up has signed a $1.3 million contract. Of course, these are small contracts when you consider that Cloudflare generated $1.1 billion in trailing 12-month revenue, but investors should not forget that the generative AI market is still in the early phases of growth, and it is expected to grow remarkably in the long run.
Fortune Business Insights estimates that the generative AI market could grow at an annual rate of 47% through 2030. So, it won't be surprising to see an increase in demand for Cloudflare's internet infrastructure services. The good part is that the company is already growing at a nice pace.
Cloudflare's revenue in the second quarter of 2023 was up 32% year over year to $308 million. The company expects $1.28 billion in revenue for the full year, which would be a 32% increase over 2022. Cloudflare guided for $0.37 per share in earnings this year, which would again be a big improvement over last year's adjusted earnings of $0.13 per share.
The addition of catalysts such as AI should help Cloudflare sustain its impressive growth for a long time to come, which is why investors looking to buy an AI stock may want to take a closer look at it before it flies higher following a 45% jump so far this year.
