The Nasdaq-100 Technology Sector index has gained 7% within the first two months of 2024, and it won't be surprising to see it jump higher as the year progresses, thanks to the proliferation of artificial intelligence (AI).
AI stocks have played a big role in boosting the Nasdaq-100 in the past year, sending the index up nearly 54% as its components, such as Nvidia (NVDA 6.18%) and Meta Platforms (META 0.43%), have delivered stunning gains of 233% and 181%, respectively. History suggests that the Nasdaq-100 tends to jump 24% on average following a year in which it achieved gains of 40% or more.
So, it won't be surprising to see the Nasdaq jump higher in 2024, especially considering the latest results from Nvidia and Meta Platforms. Let's look at the reasons why these two tech giants are all set to boost the Nasdaq and also check why now will be a good time to buy them.
1. Nvidia
Nvidia's stock market rally got a nice boost after the company released fiscal 2024 fourth-quarter results (for the three months ended Jan. 28, 2024) on Feb. 21. The chipmaker cruised past consensus estimates with record quarterly revenue of $22.1 billion, a jump of 265% from the year-ago period.
The company was originally expecting its fiscal Q4 revenue to land at $20 billion. However, its efforts to increase the supply of its flagship H100 AI graphics processing unit (GPU) to meet the robust demand from customers helped it deliver stronger-than-anticipated growth.
That's not surprising as Nvidia's foundry partner, Taiwan Semiconductor Manufacturing, popularly known as TSMC, has been aggressively increasing its advanced packaging capacity so that it can churn out a greater number of AI chips. Supply chain sources indicate that TSMC's chip-on-wafer-on-substrate (CoWoS) manufacturing capacity, which is used for making AI chips, is set to expand to 33,000 to 35,000 wafers a month by the fourth quarter of 2024. That would be more than double TSMC's estimated monthly CoWoS capacity of 15,000 wafers in December 2023.
Not surprisingly, Nvidia management pointed out on the latest earnings conference call that the supply of its AI graphics cards is improving. But what's interesting to note here is that Nvidia expects the demand for its GPUs to outpace supply despite the efforts it is undertaking to produce more chips. According to CFO Colette Kress, the company expects its "next-generation products to be supply constrained as demand far exceeds supply."
Nvidia will start ramping up the shipments of its next-generation H200 AI GPU in the second quarter. The company is claiming that this chip "nearly doubles the inference performance of H100," which doesn't seem surprising as it is expected to be manufactured using a more advanced 3-nanometer (nm) chipmaking process as compared to the H100's 5nm process. Moreover, Nvidia is packing the H200 with more memory bandwidth and capacity.
As a result, Nvidia seems to be in a solid position to maintain its impressive share of the $67 billion AI chip market in 2024. Gartner estimates that $53 billion worth of AI chips were sold last year, and Nvidia's data center revenue of $47.5 billion indicates that it controlled 90% of this market last year. A similar share this year can help Nvidia sustain its momentum, which explains why its fiscal 2025 revenue is expected to increase 83% to $110 billion.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts.
The market could reward such impressive growth with more upside. With shares of Nvidia trading at 33 times forward earnings, which is lower than the Nasdaq-100's earnings multiple of 34, investors would do well to buy this AI stock right away since its bull run seems here to stay.
2. Meta Platforms
Just like Nvidia, Meta Platforms is trading at an attractive 24 times forward earnings. Buying Meta stock at this valuation looks like a no-brainer, considering that its bottom line is expected to jump an impressive 34% in 2024 to $19.91 per share. Even better, analysts are anticipating Meta's earnings to increase at an annual rate of 26% for the next five years, a big improvement over the 11% annual earnings growth it has clocked in the past five years.
Assuming Meta can achieve this pace of bottom-line growth, its earnings could increase to $47.22 per share after five years, using its 2023 earnings of $14.87 per share as the base. If we multiply the projected earnings after five years with Meta's five-year average forward earnings multiple of 21, its share price could increase to $991. That would be a solid jump of 105% from current levels.
AI is a key reason why Meta should be able to deliver the solid earnings growth that analysts are expecting from it. The company has been integrating generative AI into its advertising tools to help advertisers improve targeting and generate stronger returns on the advertising dollars they spend. From helping advertisers create multiple backgrounds for their ad campaigns based on product images to generating ad texts, Meta believes that its Ads Manager platform can "unlock a new era of creativity that maximizes the productivity, personalization and performance for all advertisers."
Meta points out that using generative AI in advertising has the potential to help advertisers save five or more hours every week while also boosting returns on ad spending by 32%. As a result, it won't be surprising to see Meta cornering a bigger share of the digital ad market, similar to what it did last year. The company's 2023 revenue increased by 16% to $134.9 billion, outpacing the 10.7% increase in digital ad spending.
This year, analysts are forecasting a 17.3% increase in Meta's revenue to $158.2 billion, suggesting that it is on track to outpace the 13.2% projected growth in digital ad spending, as per eMarketer. The digital ad market is expected to jump to an estimated $1.5 trillion in 2030 as compared to $531 billion in 2022. So, Meta's focus on using AI to improve its influence in this market suggests that it is setting itself up for long-term growth, which is why investors should consider buying Meta stock before it soars further.
