The U.S. equity market is all geared up to end 2023 on a strong note. So far in 2023, the benchmark S&P 500 index has gained nearly 19%, while the technology-heavy Nasdaq Composite is up by 35.5%. According to ING Economics, the Federal Reserve's interest rate hike cycle has not only come to an end but the central bank is expected to cut interest rates multiple times in 2024. This bodes well for the U.S. stock market.
Investors keen to take advantage of the improving stock market sentiment can consider buying high-quality stocks riding strong tailwinds. Here's why Nvidia (NVDA 6.18%), Super Micro Computer (SMCI 8.89%), and ServiceNow (NOW 1.02%) fit the bill.
1. Nvidia
Semiconductor giant Nvidia's shares have soared by nearly 220% so far in 2023, driven mainly by its uncontested leadership in the artificial intelligence (AI) chips and software markets. Since the training and deployment of large language models (LLMs) in generative AI applications involve the use of huge amounts of computing power, demand for Nvidia's cutting-edge GPUs from data centers, content service providers, and enterprises has significantly surpassed available supply.
According to some estimates, Nvidia accounts for nearly 80% share of the AI chip market, estimated to be worth $384 billion by 2032. CEO Jensen Huang expects data centers to spend nearly $1 trillion on upgrading infrastructure for AI workloads in the next four years. This prominently involves expenses needed by data centers for transitioning from general-purpose computing (CPUs) to accelerated computing (GPUs). To capitalize on this opportunity, Nvidia also plans to opt for the yearly release of its AI chips, a shift from its previous strategy of introducing AI chips every two years.
Nvidia is also aiming for an annualized run rate of $1 billion for its recurring software, services, and support offerings in fiscal 2024 (ending Jan. 31, 2024), highlighting the company's focus on the software business.
Considering Nvidia's competitive edge in the rapidly evolving AI space and its commitment to maintaining its market leadership, Nvidia seems like an obvious pick now.
2. Super Micro Computer
A leading server and storage systems provider, Super Micro Computer has established itself as a force to reckon with in the IT infrastructure market. The company has proved to be a major beneficiary of the increasing demand for AI platforms (based on the Nvidia HGX platform ), optimized to handle generative AI workloads. Furthermore, Super Micro is also witnessing robust demand for its liquid cooling solutions, which help control energy costs and address thermal challenges and power constraints, a major downside of new GPU infrastructures in the AI platforms.
Super Micro has also developed new server platforms based on Nvidia's newer AI-optimized GPUs as well as other manufacturer product lines such as Intel's Gaudi 2 and Advanced Micro Devices' MI250 and MI300 chips for generative AI applications and edge computing applications for the telecommunications industry.
Furthermore, Super Micro's modular server architecture also makes it easier for clients to scale and/or replace specific components of the AI infrastructure. This is vital, considering that the AI revolution is still in its early stages. With the AI server market set to explode from $30 billion by the end of 2023 to $150 billion by 2027, Super Micro seems well positioned to leverage this huge opportunity as it unfolds.
3. ServiceNow
A leading IT management and business process automation player, ServiceNow's Now platform helps streamline and automate digital processes across siloed organizations. This helps increase visibility across the clients' operations infrastructure, improve cost efficiency and service delivery, strengthen collaboration, and increase responsiveness to real business problems.
ServiceNow came out with an impressive third-quarter performance, with revenue and earnings handily beating consensus estimates. This was driven by a solid 24.5% year-over-year growth (100 basis points more than the high end of the guidance) in subscription revenue to $2.2 billion -- highlighting the company's high revenue visibility and the potential to grow organically at scale. The company has also been quite successful in attracting high-value clients. This is obvious, considering that ServiceNow closed 83 deals in the third quarter with a net new annual contract value of $1 million or more, up 20% on a year-over-year basis. The company also boasts a solid customer retention rate and a renewal rate of 98%. A highly satisfied customer base drives better customer monetization, which in turn helps boost recurring revenue.
ServiceNow has managed to expand its presence across several industry verticals such as the public sector, telecommunications, retail, and financial services. The third quarter also marked the best performance of the company's federal business, which grew year over year by 75%. This is an important dynamic since government contracts involve significant time and trust between partners, thereby making it a sticky customer base. To further strengthen its position in the highly competitive enterprise software market, ServiceNow has introduced generative AI-powered Now Assist to improve productivity in all types of workflows.
Considering its impressive financial and operational metrics, diversified client base, and recent generative AI investments, ServiceNow can prove to be an attractive pick for 2024.
