Two artificial intelligence (AI) stocks to buy by hand in 2024

By | December 18, 2023

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In recent years, Wall Street has witnessed a dramatic rise in the popularity of stock splits, especially in the technology sector. Although stock splits do not change the market value of the company, they do have emotional significance.

Management typically chooses to split a stock if it believes the company’s share price is too high. Therefore, after the split, the company’s shares become more affordable and more investors can pick up a stake in the stock. As the stock becomes more attractive to a larger investor base, there is usually an increase in overall trading activity. Often this ultimately translates into an increase in the company’s overall market capitalization – at least in the short term.

Artificial intelligence (AI) has emerged as the investment theme of 2023. It’s no surprise that the share prices of some AI stocks have soared. So if you’re looking for certain high-quality AI stocks that could benefit from a potential stock split, you might want to consider taking small stakes in these two stocks.

1. Broadcom

A prominent semiconductor designer and enterprise software solutions player, Broadcom‘S (NASDAQ:AVGO) The stock price is up nearly 105% so far in 2023, reaching roughly $1,130, and management may now want to split this high-quality stock to make it more accessible to a broader investor base. A potentially more reasonable share price isn’t the only reason to like the stock; the company also has solid fundamentals and excellent financial figures.

Broadcom posted impressive financial performance in fiscal 2023 (ending October 29). While the company’s revenues grew just 8% year over year to $35.8 billion, net income rose 22.5% year over year to $14.1 billion. The company’s free cash flow (FCF) rose 8.1% year over year to $17.6 billion, translating into a solid FCF margin of 49%.

Broadcom has emerged as a key beneficiary of increasing demand for custom AI accelerators (for example, Jericho3-AI, which enables high-performance connectivity between 32,000 GPUs) and Ethernet networking solutions from cloud service providers that are upgrading data centers to handle AI workloads. Based on this trend, the company has targeted a 30% year-over-year increase in network revenues for fiscal year 2024.

In addition to its prowess in custom accelerators and network segments, Broadcom is also focused on becoming a major player in the software segment. To that end, the company has acquired VMware, a leading provider of virtualization software technology that helps create private and hybrid cloud environments for large enterprises through shared hardware infrastructure. The company has targeted $12 billion in VMware revenue in fiscal 2024.

Meanwhile, Broadcom trades at a price-to-sales ratio (P/S) of 14.2, which seems reasonable given its prowess in networking solutions and infrastructure software, AI tailwinds, and an impressive cash-generating business model. Therefore, this seems an attractive choice in 2024.

2. ServiceNow

Shares of a leading player in the field of IT management and business process automation, Service now (NYSE: NOW), have risen by about 80% in 2023 and have reached a price of about $700. Management could consider splitting the stock to further increase its attractiveness to retail investors. However, there are also several other reasons to consider this stock now.

First, ServiceNow’s Now Platform enables companies to streamline their technology, employee and customer experiences, and creator workflows. The company’s focus on enabling customers to improve the efficiency and productivity of their workforce was a solid positive in 2023, especially as the year was marked by aggressive cost cutting by major enterprises.

Second, the company’s financial performance was notable in the third quarter of fiscal 2023 (ended September 30). Subscription revenue rose 24.5% year over year to $2.2 billion. With subscription revenue accounting for nearly 97% of the company’s total revenue, ServiceNow has high revenue visibility and the ability to quickly grow revenue organically.

Third, ServiceNow has been very successful in developing a stable customer base, as evidenced by its customer renewal rate of 98% or more over the past five quarters. The company has a broad customer base of more than 7,700 enterprises worldwide, including 85% of the Fortune 500 companies. Several major customers have helped make ServiceNow’s business resilient even in difficult times.

Fourth, ServiceNow’s generative AI-driven platforms such as Vancouver and Now Assist further help customers improve workflow productivity. The company has also entered into a partnership with Nvidia to develop enterprise-grade generative AI technologies based on custom large language models (LLMs), trained on specifically tailored data, to ensure faster and smarter workflow automation.

ServiceNow trades at a price-to-earnings ratio of 17.1, much higher than the average multiple of 2.2 for the software industry. However, given the company’s solid financials, solid customer base, and generative AI capabilities, the premium valuation seems justified. Therefore, investors can consider buying this stock now.

Should You Invest $1,000 in Broadcom Now?

Consider the following before buying shares in Broadcom:

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Manali Bhade has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and ServiceNow. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Stock-Split Watch: 2 Artificial Intelligence (AI) Stocks to Buy by Hand in 2024 was originally published by The Motley Fool

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