After a year of impressive gains, the stock market appears to be taking a breather to start the new year.It's natural for investors to be wary. Nasdaq Composite (NASDAQINDEX: ^IXIC) Last year saw a significant increase of 43%. These impressive gains have investors questioning whether there is still room in the current bull market, but history can help provide some guidance.
Going back to 1972, when the tech-heavy index first traded for a full year, the Nasdaq has rallied every year following a bear market rally. another 19% on average. Of course, the results varied from year to year, from his 7% increase in 1986 to his 38% jump in 2013. That said, given the ongoing economic recovery, there's a good chance the current market rally will continue into 2024.
There is evidence that it was the emergence of generative AI that fueled last year's market surge. These advanced algorithms are deployed to handle simple tasks, allowing users to tackle more advanced chores. Although AI is still in its infancy, there are some companies that stand out from the rest and are well-positioned to benefit from the AI revolution.
No.1 AI stock: Microsoft
microsoft (NASDAQ: MSFT) is a household name, perhaps best known for its widely popular Windows PC operating system and Office suite of productivity tools.
Seeing the huge potential of generative AI, Microsoft went ahead and invested, acquiring a $13 billion stake in OpenAI, the creator of ChatGPT. More importantly, the company quickly developed Copilot, an AI-powered assistant designed to streamline time-consuming and repetitive tasks and increase productivity for software users.
Even before it was released for general availability, the company experienced a spike in demand during a “pilot” project, with 40% of Fortune 100 companies using Microsoft 365 Copilot during the company's early access program. Microsoft reported strong interest in its digital assistant, which became generally available in November.
The increased demand is already having a halo effect on Azure Cloud, which overtook its fastest-growing rival among major cloud infrastructure providers in the third quarter. Lest there be any doubt as to why, Microsoft said that his 3 percentage points of Azure's growth was due to “AI services.”
In the first quarter of fiscal 2024 (ending September 30), even before the impact of Copilot, Microsoft's revenue increased 13% year-over-year and EPS increased 27%. Add to that improving macroeconomic conditions, continued adoption of cloud computing, and tailwinds from AI, and 2024 should be a very good year for Microsoft.
Despite that opportunity, the stock is selling for 36 times forward earnings. This is a bit expensive compared to the overall market, but given its track record, Microsoft is worth every penny.
No. 2 AI stock: NVIDIA
Nvidia (NASDAQ:NVDA) It didn't start out as a star AI processor. The company made its bones as a pioneer in graphics processing units (GPUs), which display realistic images in video games. But CEO Jensen Huang realized early on that their graphics cards could be adapted to a variety of applications that require some degree of computational power, including data centers, cloud computing, and AI.
This strategy has been so successful that Nvidia's data center division, which includes processors used for AI, has surpassed the revenue generated by its gaming chips. In the company's fiscal third quarter of 2024 (ending Oct. 29), data center revenue accounted for 80% of his Nvidia revenue, up from his 41% two years ago. In the same period, the sector's revenue increased by his 350%, indicating a surge in demand for AI 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 Gino. Additionally, according to New Street Research, Nvidia controls 95% of the machine learning GPU market. As the demand for AI processing ramps up, data centers are rushing to upgrade their systems to meet AI's demanding demands. This is even better news for his Nvidia.
The available evidence seems to support that idea.In the third quarter, Nvidia record Revenues increased 206% year over year to $18.1 billion, and diluted earnings per share increased 1,274% to $3.71. To be fair, easy comps related to economic downturns skew the results, but the trajectory is clear.
Despite the company's impressive performance and great opportunities ahead, NVIDIA still trades at a reasonable price-to-earnings ratio (PEG) of less than 1 (the standard for an undervalued stock).
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Danny Vena has held positions at Microsoft and Nvidia. The Motley Fool has a position in Microsoft and He recommends Nvidia. The Motley Fool has a disclosure policy.
History suggests the Nasdaq will soar in 2024: 2 best artificial intelligence (AI) growth stocks to buy before they soar in 2024 was originally published by The Motley Fool.
