After turning in a dismal performance last year, the stock market has come roaring back, within striking distance of a new bull market. Helping fuel the market recovery is the viral excitement surrounding artificial intelligence (AI).
The list of this year's best performers is littered with companies best positioned to benefit from these next-generation algorithms. This includes the companies that make up the so-called "Magnificent Seven" stocks (as of market close on Wednesday):
- Nvidia: Up 229%
- Meta Platforms: Up 178%
- Tesla: Up 94%
- Amazon (AMZN 0.91%): Up 77%
- Microsoft (MSFT 1.15%): Up 56%
- Apple: Up 52%
- Alphabet (GOOG 1.18%) (GOOGL 1.26%): Up 50%
Of these, Apple deserves special mention as the first publicly traded stock on U.S. markets to reach a market cap of $1 trillion and $2 trillion, respectively, and is currently the only one worth more than $3 trillion dollars. Despite being the first company to surpass each of these benchmarks, one analyst believes there will soon be a changing of the guard, with three of the Magnificent Seven stocks poised to leapfrog Apple's valuation in the coming years.
Image source: Getty Images.
The generative AI catalyst
There's a compelling argument that the spark that lifted the market higher in 2023 is generative AI. These new AI models have the ability to generate original content and automate a broad cross-section of mundane and time-consuming tasks, improving processes and making workers more efficient.
The promise of these productivity gains has businesses scrambling to adopt AI to reap the expected financial rewards. Several companies at the forefront of AI have already staked their claim, making them frontrunners to steal Apple's crown.
Microsoft was arguably among the first to recognize the potential of generative AI. The company took a $13 billion stake in ChatGPT creator OpenAI early last year and quickly integrated productivity tools into Microsoft Office and its other software-as-a-service (SaaS) offerings. Copilot, the company's AI-powered assistant, offers hundreds of time- and work-saving features, including summarizing emails and drafting responses, creating presentations using provided data, writing and troubleshooting computer code, and even generating original content.
NASDAQ: MSFT
Key Data Points
Alphabet quickly jumped on the bandwagon, developing its Pathways Language Model (PaLM) LLM, which it says has the ability to "understand, generate, and translate nuanced text -- including idioms, poems, and riddles -- across a wide variety of languages," which forms the foundation for its Bard conversational AI.
Alphabet was also quick to integrate a wide range of AI tools into Google's most popular products and services, including Gmail, Google Docs, and Google Sheets, among others. Alphabet has since released Gemini AI, which Google says outperforms ChatGPT in 30 of the 32 most widely used performance benchmarks.
While some market commentators cited Amazon for being late to the party, the company has made many of the most popular generative AI models available to Amazon Web Services (AWS) customers while also making a $4 billion investment in OpenAI rival Anthropic AI.
The company recently rolled out Amazon Q, an AI-fueled assistant focused on business use cases. Q helps employees with many of the same tasks as its rivals, summarizing documents and emails, searching corporate data banks, and submitting support requests.
NASDAQ: AMZN
Key Data Points
The "Big Three" cloud providers
Needham analyst Laura Martin posits that as the three largest cloud infrastructure providers, Amazon, Microsoft, and Alphabet are uniquely positioned to offer AI services to cloud customers, which will ultimately vault their market caps to $3 trillion. "Generative AI will redefine the basis of competition for media and internet companies," she wrote in a note to clients.
Martin went even further: "Not only do [Microsoft, Amazon, and Google's] LLMs have the lowest cost structures and first-mover advantages, but their average lifetime value per Cloud customer is about to skyrocket owing to the stickiness of apps built on their LLMs," she said.
The numbers seem to bear out that opinion. It's estimated that 60% of all corporate data resides in the cloud, according to data compiled by Statista. Furthermore, 98% of corporations worldwide store at least some of their data there, according to cybersecurity solutions provider Check Point. AWS, Microsoft Azure, and Google Cloud control 31%, 25% and 10% of the market, respectively, according to data compiled by research firm Canalys. Given the vast reach of the big three, it's logical that they would be among the biggest beneficiaries of the AI revolution.
That's not to say Apple doesn't have much to gain from recent advances in AI, but the company's approach regarding how to deploy the technology will be different. Apple is more concerned with the continuing relevance of the iPhone and ensuring that its AI solutions further that goal.
Trillions at stake
No one knows for sure how far-reaching AI will ultimately be, but that hasn't stopped Wall Street's best and brightest from trying. Even the most conservative estimates are in the trillions of dollars, which makes it clear there will be many winners from the AI revolution.
Not only are Amazon, Microsoft, and Alphabet using recent developments in AI to strengthen their primary business offerings, but they also stand to gain by delivering to a wide audience via their cloud infrastructure platforms.
Finally, Microsoft, Alphabet, and Amazon are currently selling for 9 times, 4 times, and 2 times forward sales (as of this writing), making them relatively cheap when viewed in terms of the growing opportunity presented by AI.
