History is proof the U.S. stock market always climbs to new highs given enough time. But the stocks that lead the charge higher aren't always the same. To help find the new leaders, Wall Street often groups them together to separate them from the rest of the market. For example, CNBC financial analyst Jim Cramer coined the FAANG acronym in 2017 to describe five of the largest technology companies at the time:
- Facebook, which now trades as Meta Platforms
- Apple
- Amazon
- Netflix
- Google, which now trades as Alphabet
That leadership shifted in 2023 when a group of seven stocks drove the S&P 500 index to an annual return of twice its historical average. Bank of America analyst Michael Hartnett dubbed those stocks the "Magnificent Seven," and they include:
- Meta Platforms
- Apple
- Amazon
- Alphabet
- Microsoft
- Nvidia (NVDA +1.31%)
- Tesla
Image source: Getty Images.
It's time for the "AI Five," according to one analyst
With Tesla stock sinking 22% so far this year, Jim Cramer thinks it should be booted from the Magnificent Seven entirely. The company is facing sluggish electric vehicle sales in 2024, which could keep a lid on its stock price and weaken the power of the Magnificent Seven as a group.
It prompted one analyst -- Glen Kacher from Light Street Capital -- to rethink the stock market's leadership altogether. He thinks investors should be focused on artificial intelligence (AI), so he has identified a new group of stocks and called it the "AI Five." It includes:
- Nvidia
- Microsoft
- Taiwan Semiconductor Manufacturing
- Advanced Micro Devices (AMD +1.20%)
- Broadcom (AVGO +4.19%)
Each company has a hand in developing the hardware and software necessary to bring AI to life. Here are two AI Five stocks investors should consider buying right now.
NASDAQ: AMD
Key Data Points
1. Advanced Micro Devices (AMD)
Advanced Micro Devices might be one of the best semiconductor stocks to own in 2024. Its new MI300 data center chips are designed to process AI workloads, and they are shaping up to be the main rivals to Nvidia's industry-leading H100.
The MI300 comes in two configurations. The MI300X is a pure graphics processor (GPU) like the H100, whereas the MI300A combines GPU and central processing unit (CPU) hardware to create the world's first accelerated processing unit (APU) for data centers. The MI300A will power the El Capitan supercomputer at the Lawrence Livermore National Laboratory, and it's expected to be the most powerful in the world when it comes online later this year.
Some of the world's largest data center operators, companies like Meta Platforms, Microsoft, and Oracle, are also racing to get their hands on MI300 chips. They have relied almost entirely on Nvidia up until now, but supply constraints are pushing them to look for viable alternatives, and AMD is ready.
In the fourth quarter of 2023, AMD issued a bullish forecast for the MI300. The company originally expected the GPU to pull in $2 billion worth of sales in 2024, but it raised that number to $3.5 billion, much to the delight of investors.
AI is also coming to personal computers, where users can process AI on-device for a faster experience, which reduces the reliance on external data centers. AMD's Ryzen AI series of neural processing units (NPUs) already power more than 50 notebook designs, and the company is working with Microsoft to develop a new version of Windows that will run AI workloads more efficiently.
Millions of personal computers have already shipped with Ryzen AI chips, giving AMD a 90% market share in the segment. Ryzen AI drove the company's Client segment revenue to $1.5 billion in the fourth quarter, representing a whopping 62% year-over-year increase. AMD expects that momentum to continue, especially because it's preparing to launch a next-generation chip that could be more than three times faster.
Simply put, 2024 is set to be incredibly exciting for AMD, and the company could be on the cusp of a multiyear growth cycle on the back of its new hardware slate.
NASDAQ: AVGO
Key Data Points
2. Broadcom
As far as being an AI stock, Broadcom lives in the shadow of glamorous names like AMD and Nvidia. However, Broadcom is developing AI on multiple fronts, and its stock has delivered a 343% return over the last five years, so it definitely warrants some attention. Despite being founded in 1991, the company really took a leap forward when it merged with semiconductor giant Avago Technologies in 2016.
Broadcom is now a conglomerate that not only includes Avago but also several acquired companies like semiconductor device supplier CA Technologies, cybersecurity giant Symantec, and cloud software developer VMware. Broadcom spent a whopping $98.6 billion on those three acquisitions since 2018.
VMware, which had a price tag of $69 billion alone, is an increasingly important company in the context of the AI boom. Its software allows users to run virtual machines to distribute cloud infrastructure more efficiently. For example, one user on one server might only utilize 10% of its capacity, but virtual machines allow multiple users to plug into that server so it operates at capacity. Considering so many companies are racing to access AI data center infrastructure, optimization is one way they can squeeze the most value out of what they have.
Broadcom itself is also considered a leader in networking and server connectivity solutions for the data center. It developed a high-bandwidth switch called Tomahawk 5, which is designed to accelerate AI and machine learning workloads. A switch regulates how fast data travels from one point to another, and considering developers are feeding billions of data points to powerful GPUs to train AI models, it has become an important piece of the infrastructure puzzle.
Broadcom generated a record-high $35.8 billion in revenue during fiscal 2023 (ended Oct. 29), which was an increase of 8% compared to fiscal 2022. However, Broadcom's revenue is expected to grow by 40% in fiscal 2024 to $50 billion, thanks to the inclusion of VMware's financial results for the first time.
Based on Broadcom's $42.25 in non-GAAP (adjusted) earnings per share in fiscal 2023 and its current stock price of $1,226.55, it trades at a price-to-earnings (P/E) ratio of 29.1. That's a 9% discount to the 32.1 P/E of the Nasdaq-100 index, which implies Broadcom is still cheap relative to its peers in the tech sector.
Given the company's growing presence in AI through acquisitions and in-house development, Broadcom looks like a great AI Five stock to buy now and hold -- especially at this price.
