Artificial intelligence(AI) stocks have had a great run in 2023 and the early part of 2024. But after such a run, which AI stocks are worth adding in March?
One good place to look is the stocks of tech leaders that haven't yet exceeded their 2021 highs, but will still likely benefit from the AI revolution. As such, these three big tech stocks look like great buys for this month and beyond.
NASDAQ: AMZN
Key Data Points
Amazon
Amazon (AMZN 0.87%) stock is nearly back to its 2021 highs, but it's still 6% below those levels set three years ago.
Why is Amazon lagging some of its Magnificent Seven peers? The market appears a bit worried Amazon's competitor Microsoft may have a leg up on Amazon in the AI race, thanks to Microsoft's partnership with OpenAI, or that AI in general may be somewhat disruptive to some of Amazon's businesses.
But it's really just the first inning in the AI races, and it's far from clear that OpenAI's LLMs will win out and dominate the marketplace -- especially with OpenAI's internal turmoil that was recently publicized.
Meanwhile, Amazon has a number of structural advantages in both its cloud and e-commerce and advertising businesses that should help make generative AI a profit-enhancer, not a detractor.
First, Amazon Web Services (AWS) is still the largest cloud provider out there, and it's somewhat disruptive for organizations to just up and move all their data to another cloud. So, Amazon has the advantage of time and deep customer relationships to develop its own compelling AI offerings.
Of course, Amazon has been doing this in spades already, not only by developing its own large language models (LLMs) under the Titan brand name, but also hosting the broadest number of third-party LLMs for AWS clients under the AWS Bedrock platform. Additionally, Amazon offers highly cost-effective AI for applications that can run on Amazon's in-house developed chips Trainium and Inferentia.
And Amazon's non-cloud businesses, from e-commerce to advertising to physical stores and satellite broadband, are all likely to benefit from generative AI. While AI may help smaller competitors catch up to leaders in certain industries, Amazon's giant physical e-commerce distribution infrastructure is unlikely to be disrupted by an AI software algorithm. That leaves Amazon's massive and data-rich e-commerce businesses likely to be greatly enhanced by GenAI from both a revenue generation and cost perspective.
Investors have recently seen AWS' revenue growth stabilize since the broader tech downturn began in 2022, and have also seen profitability inflect upwards in Amazon's e-commerce businesses. Expect those trends to continue, and for Amazon to eventually make new all-time highs.
Micron
The memory industry is just starting to come out of one of its worst-ever slumps, yet Micron (MU +5.08%) is approaching its all-time highs from early 2022 once again.
That may seem like a contradiction, but the memory industry is very cyclical, with booms leading to busts and visa-versa. Thus, Micron is likely to experience a massive profit surge as the industry comes out of this downturn, and perhaps catapulting to new heights on the back AI demand.
As one of only three producers of leading-edge DRAM memory worldwide, Micron and its peers all cut back heavily on production last year, and repurposed their equipment to make leading edge DDR5 and high-bandwidth memory (HBM), which are currently in extremely high demand to feed AI applications.
The control of supply along with recovering demand, led by the super-strong demand for AI memory, is leading to a massive recovery in DRAM pricing and volumes. Research firm Trendforce noted a near-30% quarter-over-quarter rise in DRAM industry revenue in the fourth quarter 2023, and has projected a 20% price increase for DRAM chips in the first quarter alone.
Image source: Getty Images.
Keep in mind, these are quarterly figures, which annualize to some truly eye-opening growth numbers. Meanwhile, imbuing every electronic device with AI capabilities, from data center servers to edge computing devices to PCs should lead to double-digit increases in DRAM content per device over this period, also according to Trendforce.
Micron was a bit behind competitors in getting its HBM product to market, but just announced volume manufacturing of its HBM3E product on February 26. The new HBM3E performance boasts industry-leading performance and power efficiency, and will be a key part of the upcoming Nvidia H200 systems that will begin shipping in the second quarter.
With an AI boom just beginning and a newly disciplined memory industry on the supply side, investors should expect a strong up-cycle and better profitability going forward, which should lead Micron to new highs.
Tencent
Chinese stocks are a no-go for many investors right now. But while the geopolitical concerns are quite valid, even the best-in-class Chinese companies now trade at dirt cheap valuations.
That goes for Tencent (TCEHY +1.11%), which currently trades at a ridiculous 12.8 times earnings. And the main business is even cheaper; Tencent had listed and unlisted holdings in investee companies that totaled $112 billion as of the third quarter, amounting to about one-third of Tencent's total market capitalization. So investors can essentially buy Tencent's main businesses for just 8.5 times earnings today!
While the Chinese economy is no doubt in the dumps, Tencent still grew revenue 10% last quarter, and is a dominant leader in mobile gaming, social media, fintech, and business cloud applications. Moreover, it is becoming an AI leader, launching its first LLM, named Hunyuan, back in September.
Tencent's bargain valuation and cash-generating capabilities give it a very low bar to clear for the stock to be successful. For those comfortable investing in China or wanting some Chinese exposure, Tencent seems the best house on that block.
