1 Artificial Intelligence (AI) Stocks to Buy By Hand Before It Happens

By | February 25, 2024

Artificial intelligence (AI) is perhaps the hottest thing in the stock market right now. Euphoria surrounding the technology sent the Nasdaq Composite up more than 40% last year. Moreover, mega-cap technology companies such as the ‘Magnificent Seven’ have made great contributions to the development of the economy S&P500‘s new all-time highs.

Among the Magnificent Seven shares, Microsoft And Nvidia are often the center of media attention – and for good reason. Microsoft is a major investor in ChatGPT developer OpenAI. Meanwhile, demand for Nvidia’s graphics processing units (GPUs) is at an all-time high as applications in quantum computing and machine learning skyrocket.

One company that I think is being overlooked is an e-commerce and cloud computing specialist Amazon (NASDAQ: AMZN). The company has made some interesting investments in AI. But slowing growth in the cloud segment combined with a tense macroeconomy has some investors wary of the company’s prospects.

Let’s take a look at why 2024 could be a good year for Amazon investors. More importantly, a close look at the company’s position in the AI ​​landscape can shed some light on why Amazon shouldn’t be left out compared to its peers.

The Nasdaq could move higher

The Nasdaq Composite index has been around for just over 50 years. During that period, it has delivered negative annual returns only fourteen times.

However, over the past two decades, the Nasdaq has fallen by 30% or more only three times: in 2002, 2008, and 2022. Keep in mind that 2008 was a difficult period in financial history because it marked the beginning of the Great Recession. Moreover, 2022 may have been just as grueling for investors due to rampant inflation. But over the past few years, the Federal Reserve has taken swift action, raising interest rates in an effort to curb rising inflation.

One thing 2002 and 2008 have in common is that the Nasdaq rebounded sharply in subsequent years after sharp declines. Between 2003 and 2007, the Nasdaq returned an average of 16% per year. Moreover, from 2009 to 2010, the index rose by an average of 30%.

While it is important to understand that past performance is no guarantee of future performance, the above analysis highlights that capital markets tend to operate with a degree of resilience. Given the Nasdaq’s impressive performance in 2023, coupled with rising interest in AI, this year could be another good year for the tech-heavy index.

An image of a stock chart on a green day.

Image source: Getty Images.

Keep an eye on Amazon’s AI investments

In September, Amazon announced a billion-dollar investment in Anthropic, a competitor of OpenAI. The partnership with Anthropic included many interesting features, most of which are aimed at strengthening Amazon’s cloud business.

In recent years, companies of all sizes have slashed their budgets and operated under much tighter financial controls. This dynamic had major consequences for technology companies as demand for enterprise software declined. Amazon has not been immune to this trend and revenue from its cloud business has slowed. To add another layer of complexity, Amazon’s cloud unit represents nearly 70% of the company’s operating profits.

After reviewing management commentary surrounding the Anthropic investment, it becomes clearer how Amazon plans to use this relationship to generate new interest in the cloud. Under the terms of the deal, Anthropic will use Amazon Web Services (AWS) as its primary cloud provider. Additionally, Anthropic will also use Amazon’s internal semiconductor chips to train future generative AI models.

In a sense, Anthropic could serve as a lucrative source of lead generation for AWS. As Amazon continues to introduce more AI-powered applications in the cloud, the company could very well see a surge in demand thanks to Anthropic.

I see the potential of the anthropic relationship as largely underappreciated, if not misunderstood. Just as Microsoft implements ChatGPT in its operating system, Amazon could replicate this template to drive new acceleration in AWS.

Amazon’s valuation looks attractive

AMZN PS Ratio ChartAMZN PS Ratio Chart

AMZN PS Ratio Chart

The chart above compares Amazon to the Magnificent Seven members on a price-to-sales (P/S) basis. With a price/earnings ratio of 3.1, Amazon is the lowest valued stock of this cohort based on this measure.

The main reason why I think Nvidia and Microsoft are trading at noticeable premiums is that both companies have already shown investors how AI is positively impacting their businesses. The above trends could indicate that investors believe Amazon has too few AI capabilities compared to its peers, or that the company simply isn’t showing enough growth to earn a premium valuation.

Regardless, I view Amazon stock as dirt cheap right now. AI has countless applications and the potential to disrupt Amazon’s core e-commerce and cloud businesses.

I think the company is taking the right steps to position itself for long-term sustainable growth. While Amazon may be overshadowed by others in the big tech sector, I don’t think the company’s potential in the AI ​​landscape should be discounted. Right now, this could be a unique opportunity to acquire shares at an attractive valuation for long-term investors.

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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

History Says the Nasdaq Could Soar in 2024: 1 Artificial Intelligence (AI) Stock to Buy Closely Before It Happens was originally published by The Motley Fool

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