When we look back years from now, 2023 will likely be seen as the year artificial intelligence (AI) came of age. Early this year, ChatGPT quickly set the record for fastest growing consumer application in history, attracting 100 million users within two months of its debut. The next-generation chatbot, powered by generative AI, attracted an estimated 1.4 billion visits over the past month alone, according to Similarweb.
Excitement regarding the potential productivity enhancements and vast number of use cases for generative AI has helped propel the market higher this year. The tech-heavy Nasdaq Composite is up roughly 30% thus far in 2023, causing some to wonder if the stock market has simply risen too far, too fast.
One Wall Street veteran believes there's still much more to come and that tech stocks will "rip higher" heading into 2024, led by the next level of AI adoption.
Image source: Getty Images.
A precarious balance
The Federal Reserve Bank is meeting this week to decide the fate of short-term interest rates, and Wall Street has been concerned that additional rate hikes could stifle further market gains. Furthermore, the yield on 10-year Treasury notes currently sits above 4%, which could entice some investors to pull money from the market in favor of a relatively risk-free return guaranteed by the U.S. government, further reducing demand for stocks.
Wedbush analyst Dan Ives believes this "will-they-or-won't-they" debate about the Fed is causing investors to miss the forest for the trees, which should instead be focusing on what's ahead for 2024.
AI is driving this train
While AI has drummed up plenty of attention this year, it's still in the early stages of adoption. The earliest beneficiary of the AI revolution is Nvidia (NVDA 3.53%), which supplies the chips and accompanying software that make AI possible. In its fiscal 2024 second quarter (ended July 30), Nvidia delivered record revenue of $13.5 billion, an increase of 101% year over year. At the same time, its earnings per share (EPS) of $2.48 climbed 854%.
Microsoft (MSFT 2.13%) has also set the stage to benefit from AI. The company has begun to integrate generative AI tools into many of its most popular products and services and is charging $30 per user per month for its Microsoft 365 AI Copilot. This could add as much as $100 billion in incremental revenue for Microsoft by 2027, according to several analysts. Furthermore, as one of the largest cloud infrastructure providers, Microsoft is well-positioned to upsell these AI tools to its enterprise users.
Three stocks for the next wave of adoption
With the first wave well underway, investors should be focused on what's to come. Ives contends that while Nvidia and Microsoft still represent compelling opportunities, they represent the first wave of AI adoption, but there's still a vast opportunity ahead. In a recent industry note, he writes:
Today, it's Nvidia on the front line supplying the graphics processing units/chips, but ultimately the most important takeaway is transformational AI growth is now coming to software, chips, [and] digital media over the coming years, with $1 trillion of spending in clear sights for the tech sector.
He believes the biggest opportunities, representing "the second/third/fourth derivatives of AI spend" will begin to manifest early next year, and the "impact of the AI cycle on consumer internet will be massive."
Ives believes the most obvious beneficiaries will be the cloud infrastructure providers, including Amazon (AMZN 0.83%) Web Services and Alphabet's (GOOGL 0.11%) (GOOG 0.08%) Google Cloud. These companies are in the process of acquiring chips with the computational horsepower necessary to power these advanced systems, building out their AI capabilities, and ultimately selling these services to their cloud customers. Furthermore, AI-powered services will be integrated into Amazon's digital retail and Google's search, offering additional ways to profit.
Another company poised to benefit by integrating AI into its existing operations is Meta Platforms (META 2.15%). The Facebook parent has already developed LLaMA 2 (Large Language Model Meta AI), a foundational large language model necessary to underpin generative AI.
Meta made the controversial decision to open source this model, which it believes will stoke innovation, more rapidly advancing its AI expertise. The company has already debuted the AI-enhanced advertising tool Advantage+, which improves the efficiency and effectiveness of advertising campaigns.
Since Meta makes nearly all its revenue from the digital advertising that appears on its social media sites, the company is already set to reap the rewards of its investment.
A long-term view
One of the more interesting takeaways from Ives' missive is he's clearly advocating a longer-term view. He said: "Will Microsoft, Google, [and] Amazon (AWS) ... see the growth this quarter like Nvidia? NO ... but it's the rocket ship-like trajectory of AI-driven growth that will hit the shores of the tech industry over the next 12-18 months that speaks to our unabated bullishness for tech stocks."
If Ives is right -- and I, for one, am totally on board with the long-term thesis -- each of these companies is well-positioned to ride the AI wave for years to come. The disruption caused by AI could truly be a game changer, unleashing a surge in both revenue and profits for the companies able to harness this groundbreaking technology.
