If there's one constant on Wall Street, it's that there'll always be a next-big-thing trend captivating investors' attention. Since the advent of the internet roughly 30 years ago, we've watched as a myriad of innovations and trends have fueled optimism on Wall Street, including genomics, business-to-business commerce, 3D printing, cannabis, electric vehicles, and blockchain technology, to name a few. Right now, absolutely nothing is hotter than artificial intelligence (AI).
AI involves the use of software and systems to handle tasks typically assigned to humans. The key ingredient for AI is the inclusion of machine learning, which allows software and systems to become smarter over time, and thusly more efficient or expansive at their tasks.
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According to a report released earlier this year by PwC, AI could add $15.7 trillion to worldwide gross domestic product by 2030, with $6.6 trillion coming from increased productivity and $9.1 trillion derived from a boost in consumption.
Even if PwC's forecast proves lofty, it's crystal clear that there's a lot of money being thrown at AI innovations by many of today's largest companies. However, it doesn't mean every AI stock is necessarily going to be a winner.
As we steam ahead into November, one artificial intelligence stock stands out as a genius buy, while another widely owned AI stock is priced for perfection and best avoided by investors.
The artificial intelligence stock that's a genius buy in November: Meta Platforms
Among the dozens of large-scale companies incorporating AI into their future growth prospects, it's social media stock Meta Platforms (META -0.28%) that rises head and shoulders above the pack in November.
Meta is utilizing AI in a variety of ways on its world-leading social media platforms. For instance, it's leaning on AI solutions to filter through a veritable sea of comments on its sites to weed out those that don't meet community standards.
Perhaps an even more exciting real-world use of AI is the generative AI tools Meta began rolling out to all of its advertisers a little over one month ago. Generative AI will help advertisers tailor and customize their ads for individual users, with the end goal to improve engagement and follow-through sales.
Looking to the future, Meta aims to be a major player in the "metaverse" -- the collective term used to describe the virtual 3D environment where people will be able to interact with each other and their surroundings. CEO Mark Zuckerberg is overseeing a sizable ramp up in spending for his company's Reality Labs segment, which has developed virtual reality headsets and smart glasses for consumers.
Aside from its AI ambitions, Meta Platforms is a cash cow. The company owns four of the most-downloaded social sites on the planet: Facebook, Instagram, WhatsApp, and Facebook Messenger. Though Threads doesn't make the list, it became the fastest app to reach 100 million users (five days) when it was launched in early July.
Meta attracted nearly 4 billion monthly active users during the September-ended quarter, which means advertisers aren't going to find easier access to more eyeballs on any other social platform. Having the most-valuable social media "real estate" affords Meta exceptional ad-pricing power.
Additionally, Meta Platforms is swimming with cash. It closed out September with more than $61 billion in cash, cash equivalents, and marketable securities. Even with losses growing from its Reality Labs segment and AI investments, this cash, coupled with the $51.7 billion the company has generated in net cash from operations through the first nine months of 2023, affords Meta the ability to take risks.
The last reason Meta is such a genius buy in November is its valuation. Despite more than tripling from its 2022 bear market low, shares of the company can be purchased for roughly 10 times consensus cash flow for 2024. That's markedly below the multiple of nearly 16 times cash flow Meta has traded at over the previous five years.
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The artificial intelligence stock to avoid like the plague in November: Nvidia
However, there are two sides to every coin. Although AI has been the hottest thing since sliced bread in 2023, and no stock has benefited from this next-big-thing investment more than graphics processing unit (GPU) provider Nvidia (NVDA -1.99%), it's Wall Street's hottest megacap that deserves the cold shoulder in November.
Nvidia's claim to fame is its A100 and H100 GPUs. These are AI-driven GPUs used in high-compute enterprise data centers. AI software and systems require split-second decision-making, and Nvidia's GPUs are, currently, the foundation of AI's evolution.
The interesting thing about Nvidia's expected doubling in sales this year is that it's been fueled almost entirely by the company's pricing power. Through the first six months of Nvidia's fiscal 2024 (Nvidia's fiscal 2024 began on Jan. 30, 2023), the company's cost of revenue has actually declined from the comparable period in the previous year. With chip-fab giant Taiwan Semiconductor Manufacturing having maxed out its chip on wafer on substrate capacity, Nvidia has been unable to increase supply of its A100 and H100 GPUs.
The irony for Nvidia, and one of the reasons it's an AI stock to avoid in November, is that an expected increase in GPUs for AI-accelerated data centers in the upcoming year is likely going to be detrimental to its gross margin. Though it'll be selling more units, its A100 and H100 GPUs will no longer be scarce. As a result, the company's pricing power will almost certainly decline.
To add to the above, competition is beginning to pick up in the AI-GPU arena. Advanced Micro Devices (AMD 1.14%) debuted its MI300X GPU in June, which it anticipates will be a direct rival to Nvidia's lineup of AI-accelerated GPUs. Though AMD plans to roll out the MI300X to a handful of customers this year, it'll be demonstrably ramping up production in 2024. Likewise, Intel expects to bring its AI-driven Falcon Shores GPU to market by mid-decade. Long story short, more choices for businesses means potentially less pricing power for Nvidia.
Another concern for the hottest megacap in 2023 is that U.S. regulators have been limiting exports of high-powered AI chips to China. The global No. 2 economy orders billions of dollars' worth of chips from Nvidia. With these new restrictions in place, Nvidia could see its sales potential meaningfully crimped.
Nvidia's valuation also looks impossible to sustain, especially with AI-GPU competition picking up. Investors today would be paying nearly 46 times consensus cash flow in the current fiscal year.
The tea leaves suggest Nvidia could struggle mightily moving forward.
