Investors have a lot to celebrate. The stock market will end 2023 near all-time highs after a fierce rebound that saw the Nasdaq Composite surge more than 40% this year, one of its best performances in decades.
It sets a high bar for 2024 as investors seek ways to continue the momentum. Three Fool.com contributors sifted through their top ideas to identify Amazon (AMZN 3.43%), Super Micro Computer (SMCI 8.89%), and SentinelOne (S 1.70%) as AI stocks with the right stuff to outperform a hot market in 2024.
Here is the investment pitch for each.
Amazon's AI could be looking at a breakout year
Jake Lerch (Amazon): As of this writing, Amazon is up 83% year to date. It's been an incredible year for the company, but I believe 2024 could be even better.
That's because Amazon has only scratched the surface of its artificial intelligence (AI) potential. Indeed, in a recent interview with CNBC, CEO Andy Jassy said that "generative AI is going to change every customer experience."
AI could prove to be an enormous competitive advantage for Amazon, which prides itself on anticipating customers' wants and needs.
Take Alexa, Amazon's signature virtual assistant. Jassy noted in the interview that, "if you've studied generative AI and you're still scoffing, you're really not paying attention. ... We think we have a real opportunity to be the leader there, and we're in the process of building a much more expansive large language model underneath Alexa that will make her both much more knowledgeable and much more conversational."
In other words, get ready for a ChatGPT-like experience coming to an Alexa-enabled device near you soon. Need a new pair of shoes? Amazon wants you to talk with Alexa about the style you're looking for, compare prices, and then buy -- through an Amazon e-commerce partner, of course.
What's more, Amazon already has a massive treasure trove for training large language models -- its own data. With every search, review, or purchase, Amazon collects data that could be used to help it train and tailor its AI.
Amazon is something of a sleeping giant when it comes to AI. And 2024 could be the year that this goliath really springs to life.
The emergence of generative AI plays into the hands of this company
Will Healy (Super Micro): Super Micro Computer is not a household name for AI or tech investors. But it existed for more than 30 years and it began by selling motherboards.
Today, it's best known for selling switches, servers, and solutions for storage and networking. However, it also offers combined hardware and software solutions that have become important amid the rise of generative AI.
Additionally, its rack-scale solutions support the cloud, metaverse, 5G, and edge infrastructure. Users may also like that Super Micro designs its products to save energy and minimize the impact on the environment. That growth helped it secure over 6 million square feet of manufacturing space and establish operations in more than 100 countries.
Thanks primarily to AI-driven interest, the AI stock is up more than 250% over the last year -- outperforming powerhouse AI stocks such as Nvidia and Palantir.
There's no guarantee Super Micro will repeat those results in 2024, and supply constraints and higher capital expenditures spending weighed on the financials. Its $2.1 billion in net sales for the first quarter of fiscal 2024 (ended Sept. 30) grew 14% yearly after revenue had surged 37% higher in fiscal 2023. Also, fiscal Q1 net income of $157 million fell short of the $184 million earned in the same year-ago quarter.
Still, with the AI-driven growth in the pipeline, that decline will probably amount to a temporary setback. The company forecasts net sales of $10 billion to $11 billion, which would mean 47% growth at the midpoint.
Moreover, Super Micro's valuation significantly lags other AI giants despite the massive stock price gains. Its forward P/E ratio of 17 trails Nvidia's forward earnings multiple of 40 and Palantir's forward valuation of almost 71. That implied potential for multiple expansion and Super Micro's positioning in the AI industry will likely mean the stock continues to march higher in 2024.
Wall Street hasn't yet caught up to SentinelOne's progress
Justin Pope (SentinelOne): Cybersecurity company SentinelOne went public at the height of the last bull market. The stock initially soared, then crashed as investors fled growth stocks due to rising interest rates. SentinelOne remains over 60% off its former high despite shares surging roughly 90% in 2023. But Wall Street could still be missing just how much SentinelOne progressed over these past 24 months.
The stock's valuation peaked at a price-to-sales (P/S) ratio of over 106 but sits at just 14 today. Not only has the share price come down, but SentinelOne has been rapidly growing its business. Revenue has multiplied, and profit margins are racing higher:
S Revenue (TTM) data by YCharts
Notably, there are plenty of opportunities for SentinelOne to keep growing and become profitable over the long term. Artificial intelligence is the foundation of its core endpoint security product and is showing up in product expansions. Its Singularity Data Lake and Cloud Security products more than doubled sales year over year in Q3, and it's begun rolling out Purple AI, a generative AI that can assist customers in using SentinelOne's security products.
Analysts see SentinelOne's revenue surpassing $1 billion over the next few years. Assuming profitability continues improving as revenue grows, the stock is a prime candidate to outgrow and outrun the broader market in 2024.
