Generative Artificial Intelligence (GenAI) has seen such a rapid advance that it seems strange now that just two years ago almost no one talked about it—let alone built their companies’ earnings guidance around it. While the AI itself is far from new, the “generative” part is what kindled such a wild interest in the technology, which can now be used by everyone. With some AI leaders already reaping huge profits, investors can’t help but wonder who will be the next company to deliver a fortune for their shareholders.
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The Second Year of the AI Era: You Are Here
GenAI entered our lives in November 2022, when OpenAI unveiled ChatGPT to the general public. The ChatGPT introduction was AI’s “iPhone moment,” stimulating mass interest in the technology. However, despite the excitement around a chatbot that can answer complex questions, write essays, and help with coding tasks, it wasn’t until March of last year that investors realized they were witnessing the beginning of a paramount technological shift akin to the birth of the Internet.
The immense importance of this new advancement began to be understood in earnest when Nvidia (NVDA), which holds over 80% of the market for graphics processing units (GPUs), revealed a surge in global demand for its AI-powering chips. The long-standing innovator, who has for years created best-in-line chips for graphics and gaming, was perfectly positioned to take the lead, thanks to its chips’ ability to take on the vast workloads associated with AI.
The company reported triple-digit revenue growth since the launch of ChatGPT. It has ignited powerful investor inflows into its stock, as well as the shares of other existing and prospective AI leaders. Thus, for investors, the era of AI began with Nvidia’s earnings report release in March 2023.
The Battle of the Giants
Accelerating investor obsession with AI resulted in an incredible rally for the S&P 500 (SPX) tech giants, aka “The Magnificent Seven.” The run-up has stretched well into 2024, albeit with the exclusion of Tesla (TSLA), which is burdened by earnings declines, and Apple (AAPL), which seems to be late to the AI party. However, all self-respecting large technology companies have announced plans to pour billions of dollars into the field, producing a positive snowball effect in the stock markets.
The greatest beneficiary among the giants is Microsoft (MSFT), the largest investor in OpenAI, which also offers its own AI chatbots and tools, including the implementation of AI in its cloud platforms. Google parent Alphabet (GOOGL), the second runner-up to the chatbot scene among the publicly traded contenders (OpenAI is still private), has been experiencing some setbacks, but its overflowing coffers permit it to continue the battle for the AI crown indefinitely (in tech firms’ terms, it means “until shareholders revolt”).
Microsoft even stated back in January that Alphabet has a competitive advantage in the field thanks to its mastery of all levels of AI development, from chips to a mobile app store. This is in contrast to others – including MSFT – that have to rely on partnerships to develop the technology. In addition, the Google parent commands a massive data set to train its Large Language Model (LLM), as a result of its owning the search engine and YouTube. So, while Alphabet’s Gemini AI has had a rough ride thus far, there can be little doubt that the company will overcome these temporary glitches.
A Little Luck and a Lot of Foresight
The waves of excitement engulfed many technology stocks, which are already profiting from AI. In contrast to previous technological revolutions, many of the companies that are now at the forefront of AI have been working in the field for years. That includes firms developing advanced servers, running cloud computing systems, owning large language models (LLMs), developing sophisticated applications, and more. Building and benefitting from complex AI models or hardware advanced enough to support them requires significant resources, raising barriers to entry for those who didn’t see the change coming.
The poster child of great foresight is Super Micro Computer (SMCI), which has long been an important player in the server market but rose to fame after the revelation of the extent of AI demand. The tech’s advance sparked a massive upgrade rush across data centers to adapt to the new computational requirements. For many years, Supermicro has invested in the development of high-end, energy-efficient servers enabling high-performance computing. Now, these efforts are paying off tremendously, and analysts suggest that the demand for SMCI’s AI servers will grow at a CAGR of at least 50% over the next three years, propelling the company’s revenues sky-high.
Smart Business Strategies Pay Off
A clear winner has also been Broadcom (AVGO), which has seen its stock surge in the past year more than it has risen over three years before the onset of the AI-fueled rally. Long before the advance of AI, Broadcom made a big bet that all processing units would eventually need high-speed, low-cost, scalable, and reliable connections. Now, the company’s best-in-breed networking solutions that facilitate in-sync work of AI hardware have placed it on a path to dominance. In addition, AVGO’s acquisition of a cloud software champion VMware last year immensely broadened its AI capabilities. Broadcom’s strategy of acquiring industry leaders and honing their offerings to perfection with massive R&D investments is definitely paying off.
Oracle (ORCL) is another large-cap tech company already strongly profiting from AI. The database pioneer laid the groundwork for leadership over the last several years with its investments in cloud infrastructure and is now entering a high-growth phase, as the demand for its Gen2 AI infrastructure substantially exceeds supply. The company has seen its revenue surge in the previous quarter, but more importantly, its remaining performance obligations – sales that haven’t yet been recognized as revenue – rose to a record high, suggesting even stronger results on the horizon. The company’s cloud infrastructure business, which competes against Amazon’s (AMZN) Web Services, Google Cloud, and Microsoft’s Azure, grew over 50% year-over-year, much faster than its competitors. Oracle is gaining market share from these giants thanks to its close relationship with Nvidia: it is one of the first cloud service providers to integrate Nvidia’s newest chips, and recently signed a cloud infrastructure agreement with the chip-design leader.
A Gold Rush of Spending on AI
An immensely disruptive and transformative technology can create wealth along the value chain, which can later spill into industries not directly connected to the tech’s development and implementation. Just like with the advent of the Internet, this can benefit – and change – the economy as a whole. However, at this early stage, it’s impossible to forecast the extent of these changes or to name the biggest non-direct beneficiaries.
The only certainty is that in the past year, enterprises have been rushing to implement and utilize AI in a variety of ways and on every level – to improve operations, increase efficiency, and upgrade capital structure. This “gold rush” of spending across the tech and communications sectors on AI upgrades creates strong tailwinds for software and hardware AI enablers and implementers.
Further down the road, an AI tailwind will lift additional cohorts of stocks, such as tech consultants helping companies implement the technology into their processes, project managers overseeing massive data center upgrades, software contractors customizing AI chatbots, tech education specialists helping employees stand up to the task, and many more. While currently the monetization results are mainly seen in the “picks and shovels” realm, that may change in the blink of an eye.
Hard Facts and Soft Power
In hardware, Dell Technologies (DELL), which lagged behind its competitors for years, has surprised on the upside with the report on strong demand for its servers with AI capabilities. The PC maker HP (HPQ) has recently introduced the industry’s largest portfolio of laptops and mobile workstations leveraging the power of AI. IBM (IBM), previously dismissed by investors as “a sleeping giant,” is suddenly making waves with its AI-powered data platform, as well as its cost reduction through the replacement of some marketing and communications roles with GenAI. The world’s largest semiconductor foundry Taiwan Semiconductor (TSM), which produces 90% of the chips used in AI training and applications, including those designed by Nvidia, said that the tech will be its main revenue driver this year.
In software, beyond the megacap hyperscalers, a growing number of companies are reaping large benefits from the new technology. It must be said, however, that most, if not all of the gains are currently concentrated within those who pivoted to AI before their competitors (and who possessed the resources to do so).
Thus, the enterprise software leader Salesforce (CRM) has shown strong revenue growth led by its latest generative AI, multi-cloud, and e-commerce integration offerings. Autodesk (ADSK), which develops software for architecture, engineering, and other professional uses, posted stronger-than-expected earnings after adding some generative AI tools to its applications and announcing work-in-progress on new AI-powered software. The workflow software provider ServiceNow (NOW) reported 36% earnings growth last quarter, saying that its GenAI products immensely contributed to the value of new contracts. Workday (WDAY), a top developer of HR and other management tools, swung from net loss to profit in the past year. The company said it expects to double in size over the next several years thanks to its strategic initiatives, including incorporating high-value generative AI capabilities into its tools.
Cash-Rich Late-Comers May Have a Chance
Several mega- and large-caps have been late to the GenAI first surge, but they are still making significant strides towards taking their piece of the pie. Since the technology is still emerging, they may have a chance to claim their share of profits. However, at this stage, second place is reserved for capital-rich companies that have at least something to show in the field of AI already.
Thus, Apple has missed the AI-related rally this year, but that may soon change. True, its internal efforts at AI, namely the Siri assistant, haven’t sparked much enthusiasm – but the iPhone maker takes the tech seriously. The company has been acquiring AI startups since at least 2016, including the latest buyout of a Canadian firm DarwinAI, which is known for its platform for generating slimmed-down AI models. This solution comes in handy for Apple, which is expected to announce GenAI integration into its iOS operating system, with the tool running directly on phones without relying on a connection to a server. If that works out well, Apple may be in a good position to make up for the time it wasted playing with Apple Car and other unsuccessful projects.
Tesla is also one of the longest-standing players in the AI scene. Despite its stock’s dismal performance this year, it is still the world’s most valuable carmaker – because it’s not just a carmaker, but a tech empire encompassing several cutting-edge ventures: solar, battery storage, artificial intelligence computing, robotics, and more. In the field of AI, Tesla has been working in several niches, including building AI chips to run its full self-driving (FSD) software. The company is also working to combine its robotics capabilities with GenAI tech. It has introduced a humanoid robot called Optimus Gen 2 – a general-purpose machine that can interact with humans and perform various tasks. While monetization of humanoid robots is still far off, being a pioneer in the most advanced technological developments may pay off handsomely in the future.
Another “late bloomer” with sufficient cash to compete in the AI race is Adobe (ADBE). The publishing and media software champion entered the Gen AI field a year ago with Firefly, which generates images from a text prompt. The Firefly is focused on the needs of professionals working with Adobe’s suite of creative tools – that’s why it hasn’t seen the sweeping popularity of DALL-E, Midjourney, and other AI image-generation tools. However, creative professionals welcomed Firefly, and analysts are optimistic regarding its monetization path, as the company has a multi-year head start in the field of creative software. In addition, Adobe has recently launched a beta version of an AI assistant for its Reader and Acrobat applications, which can summarize documents and answer questions about the text. If successful, the tool will likely enjoy surging demand from students, scholars, and basically anyone working with documents.
The Investing Takeaway
The onset of Artificial Intelligence is an ongoing technological revolution, which may be even more impactful than the Internet. AI will eventually supercharge our economy, with virtually unlimited potential uses for the technology.
AI is a long-term play. However, we are at a very early stage of the process, and it’s hard to know who the winners and losers will be. While every company out there seems to try to mention its “AI implementation,” significant monetization still belongs to the chosen few. Right now, the companies building the infrastructure of the future AI economy are the ones that are already capitalizing on the technology.
Further down the road, the cohort of AI winners will immensely – and mostly unforeseeably – expand (remember, when the Internet was as new as AI now, Amazon was a small online bookshop). But now, I suggest sticking with those already beginning to capitalize on the tech, while “checking the pulse” of the adjacent industries and players ready to take the baton.
In addition, a gentle reminder: the AI appreciation rally has lifted many stocks’ valuations to very high levels, increasing the probability of a significant correction. And while the long-term investment case for AI enablers and implementers stays intact, I believe it would be prudent to diversify into holdings that can provide a counterweight to the market mood swings.
