Over the past 30 years, a seemingly endless stream of next-big-thing investment opportunities have captivated the attention of professional and everyday investors. Innovations, such as the advent of the internet, have changed the respective growth arc of the U.S. economy.
Right now, no investment trend has folks more excited than the artificial intelligence (AI) revolution.
AI involves the use of software and systems to handle tasks that would normally be overseen by humans. The not-so-secret ingredient that's fueled the potential for AI is machine learning (ML), which allows software and systems to "learn" and become more proficient at their tasks over time.
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AI is widely believed to have application in most sectors and industries. It's encompassing use compelled the researchers at PwC to predict a whopping $15.7 trillion bump in global gross domestic product (GDP) from AI by 2030.
The undeniable potential of artificial intelligence isn't lost on Wall Street or its analysts. Price targets for most AI stocks have soared over the past year and change. This has been especially true for leading AI stock Nvidia (NVDA 6.18%).
A trio of AI stocks may offer greater upside than Nvidia
Just shy of one month ago, Rosenblatt analyst Hans Mosesmann initiated a Street-high price target of $1,400 per share on Nvidia. Should Mosesmann's prognostication prove accurate, Wall Street's darling AI stock would gain 59% and add about $1.3 trillion to its already lofty market cap.
There has certainly been an abundance of reasons for investors to fall in love with Nvidia. Its A100 and H100 graphics processing units (GPUs) have become staples in high-compute data centers. As a result, Nvidia has enjoyed exceptional pricing power on its AI-accelerated GPUs and completely blown Wall Street's sales and profit forecasts out of the water. To boot, a majority of the "Magnificent Seven" are aggressively purchasing its Ai infrastructure.
However, trouble may be brewing in paradise. While it's no secret that external competition is building in the AI-GPU arena, what many investors appear to be overlooking is that Nvidia's four largest customers by sales -- Microsoft, Meta Platforms, Amazon, and Alphabet -- are developing AI-GPUs of their own. These four businesses are aiming to lessen their reliance on Nvidia's chips and appear poised to reduce the magnitude of their orders in future years.
Furthermore, Nvidia's growth has the potential to be its own undoing in the current and subsequent fiscal years (Nvidia's fiscal year ends in late January). GPU scarcity has been a driving force behind Nvidia's data-center sales growth. As it increases its own production and external/internal competition ramps up, GPU scarcity will lessen. When it does, Nvidia's GPU pricing power, and thus its gross margin, should meaningfully contract.
Despite Mosesmann's lofty price target, three other AI stocks could yield juicier returns, based on the high-water price targets of select Wall Street analysts.
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JD.com: Implied upside of 100%
The first company depending on AI solutions to fuel its growth that could outpace Nvidia in the return department is China's JD.com (JD 6.12%). Analyst Fawne Jiang of Benchmark set a price target of $55 on shares of JD less than two weeks ago, which would imply upside of 100%, based on where the stock closed on March 15.
JD firmly announced its entrance into the AI race last summer when it introduced large language model (LLM) ChatRhino. JD aims to leverage its LLM technology within the industrial setting to shorten innovation timelines and lessen supply chain issues within the finance, health, retail, and logistics space. Though development for ChatRhino began in 2021, JD's team of engineers wanted to fine-tune the technology before introducing it on a broader scale.
While JD.com is counting on AI to power its growth potential, the company's foundational operating segment continues to be its e-commerce platform. JD slides in behind Alibaba as China's No. 2 online retail marketplace.
What's helped differentiate JD from Alibaba is its e-commerce operating model. Whereas Alibaba has leaned heavily on third-party marketplaces, JD operates as a true direct-to-consumer (DTC) company. In other words, it handles the inventory and logistics of getting purchased products to consumers. Having more control of these various DTC processes means JD can deliver superior margins over the long run.
JD.com is cheap, as well. Even following its recent rally, shares are valued at just 8 times forward-year earnings. This makes Jiang's $55 price target a genuine possibility.
SentinelOne: Implied upside of 68%
A second AI stock that offers more upside than Nvidia, at least based on the forecast of one Wall Street analyst, is endpoint cybersecurity company SentinelOne (S 1.70%). Analyst Peter Weed at Bernstein expects SentinelOne will reach $37 per share, which would yield 68% upside to come if he's correct.
The beauty of cybersecurity solutions is that they've become a basic necessity. No matter what's happening with the U.S. economy, hackers and robots don't take time off from trying to steal sensitive enterprise data. Third-party providers like SentinelOne are increasingly seeing the onus of protection falling onto their shoulders.
SentinelOne's platform, known as Singularity, leans on AI and ML. The incorporation of AI and ML allows Singularity to "learn" so it can become more effective at identifying and responding to potential threats over time.
Although its growth ramp has been a bit bumpy at times, the company's key performance indicators suggest its platform is finding the mark with businesses. Of particular note, SentinelOne counted 1,133 customers generating at least $100,000 in annual recurring revenue (ARR), as of Jan. 31, 2024, which is up 30% from the prior-year period. Rapidly rising ARR above the $100,000 mark suggests the company is landing larger clients, which is a necessity if it's to turn the corner to recurring profitability.
SentinelOne's subscription pricing model is also a benefit. Subscription-driven models often lead to predictable cash flow and improve customer retention.
Though getting from Point A to B rarely occurs in a straight line on Wall Street, Weed's price target may be within reach over the next two years.
Baidu: Implied upside of 102%
Last but not least, Wall Street's high-water price target on China-based Baidu (BIDU 0.62%) suggests it can run circles around the infrastructure backbone of the AI movement, Nvidia. Analyst Fawne Jiang of Benchmark, who believes JD.com can double, has also placed a $210 price target on Baidu. If this level were to become reality, Baidu's shareholders would enjoy a 102% increase in value.
Baidu's ties to AI come in two forms. First, it operates one of the largest AI cloud infrastructure service platforms in China. Enterprise cloud spending is still taking off, so there's a real chance Baidu can enjoy sustained double-digit growth from its AI Cloud segment.
Secondly, Baidu is the parent of Apollo Go, the world's most-successful autonomous ride-hailing service. This intelligent-driving company has overseen more than 5 million accumulated rides since its inception.
While these AI-driven operating segments are providing a lift to Baidu's organic growth rate, the company's cash-cow segment remains its internet search engine. According to data from GlobalStats, Baidu accounted for 60.1% of internet search share in the world's No. 2 economy by GDP in February. With few exceptions, Baidu's search engine has maintained a 60% to 85% share of internet search in China over the past nine years. As the clear go-to for merchants wanting to target consumers, Baidu should enjoy exceptional ad-pricing power.
Further, Baidu is sitting on a mountain of capital. As of the end of 2023, it held north of $28 billion in cash, cash equivalents, and various short-term investments. This capital gives Baidu plenty of flexibility on the innovation front, while providing a healthy downside buffer for its stock.
Baidu's forward price-to-earnings ratio of a little over 8 is remarkably cheap, which suggests the stock has a reasonable shot of hitting Jiang's price target of $210 within the next 12-to-24 months.
