History suggests the Nasdaq will rise in 2024: 2 great artificial intelligence (AI) growth stocks to buy before that happens

History suggests the Nasdaq will rise in 2024: 2 great artificial intelligence (AI) growth stocks to buy before that happens

After a year of stunning gains, the stock market appears to be taking a breather to start the new year. Investors are justifiably cautious yet Nasdaq Composite (^ xix -0.36%) It achieved gains of 43% last year. Given these stellar gains, investors are wondering whether the current rally is still there – and history can help provide some guidance.

Going back to 1972 — the first full year the technology-based index was traded — every year after a bear market rebound, the Nasdaq rose last 19% on average. Results vary by year, of course, ranging from a 7% increase in 1986 to a 38% increase in 2013. However, given the ongoing economic recovery, chances are good that the current market rally will continue in 2024.

There is evidence to suggest that it was the emergence of generative AI that drove the market higher last year. These advanced algorithms are deployed to handle menial tasks, freeing the user to do higher level household tasks. Although it’s still early days for AI, there are two companies that stand out from the crowd and are well-positioned to benefit from the AI ​​revolution.

Image source: Getty Images.

AI Stock #1: Microsoft

Microsoft (MSFT -0.23%) Arguably a household name, best known for its ubiquitous Windows PC operating system and Office suite of productivity tools.

Seeing the huge potential of generative AI, Microsoft has surged to the forefront, acquiring a $13 billion stake in OpenAI, the creator of ChatGPT. More importantly, the company quickly developed Copilot, an AI-powered assistant designed to make users of its software more productive by simplifying repetitive, time-consuming tasks.

Even before it went into general availability, the company saw high demand during its “beta” project, with 40% of the Fortune 100 using Microsoft 365 Copilot during the company’s early access program. Microsoft announced its strong interest in the digital assistant, which became generally available in November.

The increased demand is already having a halo effect on Azure Cloud, which swept away its competitors as the fastest-growing among major cloud infrastructure providers in the third calendar quarter. Lest there be any doubt why, Microsoft said three percentage points of Azure’s growth was for “AI services.”

For the first quarter of fiscal 2024 (ending September 30), Microsoft’s revenue grew 13% year over year, while earnings per share rose 27%, even before the impact of Copilot. Add to that improving macroeconomic conditions, continued adoption of cloud computing, and tailwinds from artificial intelligence, and 2024 should be a very good year for Microsoft.

For all this opportunity, the stock is selling for 36 times forward earnings. While this represents a slight premium to the overall market, given its track record, Microsoft is worth every penny.

AI Stock No. 2: Nvidia

Nvidia (NVDA -0.95%) He didn’t start out to be the AI ​​wizard of the stars. The company has made its bones by pioneering graphics processing units (GPUs) that display lifelike visuals in video games. However, CEO Jensen Huang realized early on that its graphics cards could be adapted to a variety of uses that required some degree of computing power, including data centers, cloud computing and artificial intelligence.

This strategy has been so successful that Nvidia’s data center segment — which includes processors used for artificial intelligence — has surpassed revenue generated by gaming chips. During the company’s fiscal 2024 third quarter (ending Oct. 29), data center revenue represented 80% of Nvidia’s sales, up from 41% two years ago. During the same period, this sector’s revenues increased by 350%, which helped explain the growing demand for artificial intelligence processors.

To be fair, Nvidia is already the gold standard for processors used in data centers, with a 95% market share, according to CFRA analyst Angelo Zino. Furthermore, Nvidia controls 95% of the machine learning GPU market, according to New Street Research. As demand for AI processing rises, data centers are scrambling to upgrade their systems to meet the stringent AI requirements – which bodes more good news for Nvidia.

Available evidence seems to support this idea. In the third quarter, Nvidia introduced register Revenue rose 206% year-over-year to $18.1 billion, pushing diluted EPS up 1.274% to $3.71. To be fair, the soft standings associated with deflation skew the results, but the path is clear.

Despite the company’s impressive performance and the tremendous opportunity ahead, Nvidia still trades at a reasonable price/earnings-to-growth (PEG) ratio of less than 1 — the benchmark for undervalued stocks.

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