The mad dash to adopt artificial intelligence (AI) began in earnest early last year, driving impressive gains for those companies best positioned to profit from this sea change in technology. The resulting bull run among AI stocks has helped sustain the ongoing market rally.
In recent weeks, however, some investors have begun to get skittish, wondering how long this relentless run could go on and looking for evidence the AI revolution was intact. Results from the poster child of AI, Nvidia (NVDA +4.30%), provided some answers.
With that as a backdrop, chip designer Arm Holdings (ARM +14.68%) jumped 6.7%, software and cloud specialist Microsoft (MSFT +2.13%) rallied 2.3%, and AI chip specialist Broadcom (AVGO +0.67%) climbed 2.1% as of 12:32 p.m. ET on Thursday.
A check of all the usual sources -- changes to analysts' ratings, earnings results, and regulatory filings -- turned up nothing in the way of company-specific news that helped fuel gains for stocks in the space. That said, there was one obvious catalyst that helped spark a relief rally for AI stocks.
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Solid AI-fueled results
Chipmaker Nvidia released its quarterly financial report after market close yesterday, and by most measures, the results were superb.
For its fiscal 2025 second quarter (ended July 28), Nvidia generated revenue of $30 billion, up 122% year over year and 15% sequentially. This produced adjusted earnings per share (EPS) of $0.68, which surged 152% year over year and 11% sequentially. For context, analysts' consensus estimates were calling for revenue of $28.7 billion and EPS of $0.64, so Nvidia surpassed expectations on both counts.
That said, there were a couple of areas of note that investors may have had concerns about.
For the upcoming third quarter, the company is forecasting revenue of $32.5 billion, an increase of 80% year over year. While results of that magnitude would normally be cause for celebration, it's a deceleration for the triple-digit year-over-year growth Nvidia has generated for the past five quarters.
Another area being closely watched is Nvidia's gross margin. While the measure -- which clocked in at 75.1% -- was still historically high, it was down from the 78.4% the company delivered last quarter. Management chalked that up to inventory provisions for its Blackwell processors and product mix, but investors hate uncertainty.
Those small quibbles aside, Nvidia's results provide sufficient evidence that the adoption of AI is continuing at a brisk pace, which bodes well for other companies impacted by the secular tailwinds of AI.
Why it matters
There's little question that generative AI has the potential to be transformational. These systems tend to automate mundane, time-consuming tasks, thereby increasing productivity. Our trio of stocks is each heavily invested in the success of AI:
- Arm Holdings created the blueprints for the state-of-the-art CPU cores included in processors created by Nvidia and others, and are a critical element in AI systems.
- Microsoft was one of the first movers in the AI software space, creating Copilot, an AI-powered digital assistant deeply integrated into its cloud and software systems, designed to streamline processes, thereby saving time and money.
- Broadcom creates many of the semiconductors and other technology used in data centers and cloud computing.
These companies can't all be painted with the same brush, as they each have a unique contribution to the AI ecosystem. That said, some investors view them as a part of the broader AI revolution.
Despite the recent uncertainty, these stocks still boast lofty valuations and are not for the faint of heart. Arm Holdings, Broadcom, and Microsoft are selling for 85 times, 34 times, and 32 times forward earnings, respectively. Of the three, Microsoft and Broadcom are the least expensive, but all three are deserving of a premium befitting their position in the industry and the opportunity represented by AI. Investors merely need to decide how high a price they're willing to pay.
Developers are only now coming to grips with the potential uses of AI, and new applications are being discovered almost every day. Investors would do well to buy the best AI stocks they can find and hang on for dear life.
