In a matter of days, we'll be crossing the finish line for 2023 and saying goodbye to what's been a stellar year for the bulls. The ageless Dow Jones Industrial Average has climbed to all-time highs, while the benchmark S&P 500 and growth-fueled Nasdaq Composite find themselves within striking distance of respective record closes.
Though there are a number of factors responsible for pushing the broader market higher in 2023, including an expected easing of Federal Reserve monetary policy in the new year, it's artificial intelligence (AI) that stands head and shoulders above seemingly every other catalyst.
Image source: Getty Images.
When I say "AI," I'm talking about the use of software and systems in combination with machine learning (ML) to handle tasks that would normally be undertaken or overseen by humans. The use of ML allows AI-driven software and systems to grow smarter and become more efficient at their tasks over time. Because AI has theoretical utility in all sectors and industries, analysts at PwC see it adding $15.7 trillion to global gross domestic product by 2030.
This massive opportunity isn't lost on Wall Street. Based on the high-water price targets set by a select group of Wall Street analysts, three AI stocks are expected to surge by 48% to 123% in 2024.
Nvidia: Implied upside of 123%
If there's a stock that's become the face of the AI revolution, its semiconductor giant Nvidia (NVDA 6.18%). Shares of the company are higher by 237% this year, as of the closing bell on Dec. 26, with a market cap gain of nearly $859 billion.
However, this outperformance could be just the tip of the iceberg, according to analyst Hans Mosesmann of Rosenblatt Securities. Mosesmann has placed a lofty $1,100 price target on Nvidia, which implies additional upside of 123%. If Mosesmann's forecast is correct, he expects Nvidia's market cap to grow by $1.5 trillion in the new year.
Nvidia has established itself as the infrastructure backbone of the AI movement. The company's A100 and H100 graphics processing units (GPUs) are the effective "brains" powering split-second decision-making in AI-accelerated data centers. Analysts at Citigroup estimate that Nvidia's AI-inspired GPUs could control a greater than 90% share of AI GPUs utilized in high-compute data centers in 2024.
But the kingpin of AI also has the potential to be done in by its own success. With chip fabrication company Taiwan Semiconductor Manufacturing increasing its chip-on-wafer-on-substrate capacity, Nvidia will be able to meet more enterprise demand in the coming year. On the flipside, a lack of AI-GPU scarcity could quickly erode the phenomenal pricing power on its A100 and H100 GPUs that have fueled its sales growth. This means Nvidia's gross margin could sink as sales of A100 and H100 chips ramp up.
Furthermore, U.S. regulators have been limiting exports of Nvidia's top AI-powered chips to the world's No. 2 economy, China. Nvidia has even had export restrictions placed on toned-down versions of its AI-driven chips developed specifically for the Chinese market. China typically accounts for 20% (or more) of Nvidia's annual sales.
Although it's been a truly banner year for Nvidia, reaching Mosesmann's price target in 2024, or anytime soon, looks like a pipe dream.
Baidu: Implied upside of 94%
A second artificial intelligence stock with mammoth upside potential is China-based Baidu (BIDU 0.62%). Despite it being up just fractionally (0.2%) on a year-to-date basis, one analyst sees this search engine juggernaut nearly doubling in 2024.
According to Bank of America Securities analyst Eddie Leung, Baidu shares can ascend to $222 in the new year. If Leung's prognostication proves accurate, it would value Baidu at 20 times forecast earnings per share in 2024, which is still a reasonable valuation for a company with an extensive history of double-digit sales and earnings growth.
Baidu is best-known for its leading internet search engine. In November, the company achieved a nearly 69% search share in the world's No. 2 economy by gross domestic product. Looking back nine years, Baidu has fairly consistently sustained a 60% to 85% share of China's internet search market. This makes it the obvious go-to for businesses wanting to target consumers, and affords Baidu excellent ad pricing power.
But what makes the Baidu growth story so exciting is the company's AI ties. Baidu is one of the country's leading AI-driven cloud service providers. It also operates Apollo Go, which is the world's most successful autonomous ride-hailing service, based on the 4.1 million rides it's provided since inception. Leaning on artificial intelligence has helped drive Baidu's non-online marketing sales higher by double digits (in most quarters) on a year-over-year basis.
The other potential catalyst for Baidu is the rebound of the Chinese economy following the worst of the COVID-19 pandemic. China's regulators abandoned the controversial "zero-COVID" mitigation strategy in December 2022. Though it's taking time to work out persistent supply chain kinks, the economy is well positioned for expansion, which should favor a recurringly profitable juggernaut like Baidu.
While a 94% gain in 2024 would be a tall task, it's not out of the question.
Deliveries of Tesla's all-new Cybertruck began on Nov. 30. Image source: Tesla.
Tesla: Implied upside of 48%
The third artificial intelligence stock with meaningful upside in 2024, at least according to one Wall Street analyst, is electric vehicle (EV) maker Tesla (TSLA -1.11%). Tesla's EVs incorporate AI technology into its advanced driver assistance systems, which includes its full self-driving subscription.
Even though shares of North America's leading EV producer have increased by 108% this year, through Dec. 26, Morgan Stanley analyst Adam Jonas believes they'll march higher by another 48% in the new year to $380. Jonas's price target values Tesla at roughly $1.2 trillion.
One of the reasons Jonas is depressing the accelerator on Tesla is the rollout of its newest vehicle, the Cybertruck. Tesla began deliveries for its Cybertruck on Nov. 30. CEO Elon Musk has previously noted that his company had over 1 million reservations for Cybertruck; but keep in mind that only a $100 fully refundable deposit was required to get in line.
Jonas is also intrigued by Tesla's push to become more than just a car company. Its energy generation, storage, and services segments are, collectively, generating a gross profit. Moving beyond selling and leasing EVs has the potential to minimize Tesla's sensitivity to cyclical swings in the U.S. and global economy.
However, I'd add to the above that Tesla's ancillary segments generate low margins. The company's profitability is almost entirely dependent on selling and leasing EVs, along with selling renewable energy credits and generating interest income on its cash.
What's incredibly worrisome for North America's leading EV company is that its operating margin has been more than halved over the trailing year (ended Sept. 30). Musk stated during the company's annual shareholder meeting in May that Tesla's pricing strategy is dictated by demand. With Model's 3, S, X, and Y all enduring more than a half-dozen price cuts in 2023, it pretty clearly signals that inventory levels are rising and demand isn't what it once was.
Further, Musk brings added risk to the table. Musk has frequently failed to deliver on touted innovations and has, on a couple of occasions, found himself in the crosshairs of securities regulators.
Between these factors and Tesla's egregiously high valuation for an auto stock (68 times forward earnings), it's unlikely that Jonas' lofty price target will be met in 2024.
