Over the past year, generative artificial intelligence (GenAI) advancement has emerged as a key transformation within the tech industry. While conventional applications of AI continue to influence day-to-day activities like facial recognition, voice assistant technology, and e-commerce recommendations, GenAI presents breakthroughs in generating original content. This innovation transcends mere data analysis and interpretation.
The surge in GenAI technology is reinvigorating the tech industry following a period of reduced growth due to rising interest rates and the fallout from the pandemic boom. The industry grappled with lower earnings and layoffs throughout 2023.
Despite economic challenges, the industry saw unprecedented investments in GenAI startups – a stellar $10 billion globally in 2023, exhibiting a significant 110% surge as compared to 2021. The launch of OpenAI’s ChatGPT tool has particularly stimulated this growth, inciting an influx of venture capital funds into the groundbreaking sector.
Despite grappling with IT challenges in 2023, companies worldwide have actively been seeking opportunities to leverage GenAI for business transformation. According to the International Data Corporation, companies invested over $19.4 billion in GenAI solutions. As related infrastructural hardware, software, and IT and business services spending is set to double in 2024, estimates suggest an exponential rise to $151.1 billion by 2027, growing at an 86.1% CAGR.
Nevertheless, the widespread adoption and execution of GenAI remain weighed down by unanticipated complexities and concerns. The disruption of conventional operational structures and anxieties around employee and enterprise adaptability represent significant hurdles. Given geopolitical considerations, apprehensions around the potential misuse of technology are also prevalent. Nevertheless, these challenges do not obscure several opportunities that lie ahead.
As the world stands on the brink of an AI-driven transformation, the investment world is abuzz, anticipating the robust AI stocks poised to generate substantial wealth in 2024. As we delve deeper to discuss the AI behemoths, the investment potential of these enterprises can be deciphered from the intricate narratives of market dominance and innovative feats enshrined in their quarterly reports and strategic trajectories.
Some insights into each company's AI initiatives and growth potential are discussed below:
MSFT has been leading the charge in the GenAI revolution, largely credited to its substantial investment into OpenAI – the developer of ChatGPT. The integration of AI into a broad cross-section of its products and services has also played a significant role. The company had an excellent operational year in 2023, with anticipations for growth rate acceleration extending into 2024.
During the fiscal year of 2023, MSFT made extensive investments in GenAI and Azure cloud deployment, with predictions indicating a similar trend for this year. With easing macroeconomic challenges and increased focus on AI cloud services, CEO Satya Nadela remains optimistic about the long-term growth driven by OpenAI, the AI-backed startup.
MSFT's AI strategy is seeing fruition, with its intelligent cloud sector experiencing robust double-digit growth. This growth is largely attributed to AI advancements, contributing to a 21% increase in server products and cloud services in the fiscal first quarter of 2024.
The future for MSFT looks promising as AI integrations are only beginning to emerge. Marking one of the most significant shifts in the past three decades, MSFT commenced the new year with a major announcement reflecting the increasing influence of AI in daily life.
The tech giant launched Copilot, a suite of AI protocols to enhance productivity while using its products and services. The company's first quarter (ended September 30) financial results for fiscal 2024 revealed that 40% of Fortune 100 companies had adopted Copilot through MSFT's early access program.
With Copilot now available to its enterprise customers, investors are anticipating the manifold impacts of AI on MSFT's results. Further expanding MSFT's AI footprint, the "Copilot" key will be incorporated into the Windows PC keyboard, allowing users to launch Copilot instantly.
Furthermore, CFO Amy Hood suggests that the next-GenAI business could potentially be the swiftest-growing $10 billion business in history, with a bulk of this growth propelled by cloud technology.
During MSFT's fiscal first quarter of 2024, Azure's revenue saw a 29% year-over-year growth, surpassing some of its competitors. MSFT attributed "roughly three points" of Azure's growth to the increased demand for AI services.
Research firm Canalys reported that before the recent uptick, Azure's cloud growth had observed seven consecutive quarters of slower year-over-year growth. The report also indicated an increased demand following the debut of Copilot in September, reaffirming MSFT's stance that AI is driving its current growth surge.
Analysts expect MSFT's revenue and EPS to increase 15.2% and 5.8% year-over-year to $60.87 billion and $2.59, respectively, in the fiscal third quarter ending March 2024.
The semiconductor industry leader NVDA’s considerable recognition for its AI advancements was evident when Microsoft-backed OpenAI's ChatGPT seized global attention in late 2022 – a tool reportedly trained using 30,000 of NVDA's A100 data center GPUs. Not surprisingly, the demand for NVDA's AI chips increased dramatically, with its flagship product, H100 data center GPU – achieving considerable success by 2023.
NVDA has been capitalizing on AI’s substantial growth, high-performance computing, and accelerated computing, which have effectively bolstered its Compute & Networking revenues. The surge in demand for GenAI and large language models using GPUs based on NVDA's Hopper and Ampere architectures is forecasted to enhance its data center end-market business.
NVDA witnessed an upsurge in Hyperscale demand while also noticing a robust uptake of AI-based smart cockpit infotainment solutions. Its strategic collaborations, particularly with Mercedes-Benz and Audi, are projected to essentially drive NVDA's knack in autonomous vehicles and other automotive electronics spaces.
NVDA would be working with the Foxconn Group in a pioneering move toward the inception of modern factories and industries, with an emphasis on leveraging AI in manufacturing processes.
NVDA anticipates a shipment of 2 million units of the H100 model by 2024. The current fiscal year foresees the company securing revenues of $58.80 billion, suggesting that H100 could be a significant revenue catalyst in the upcoming fiscal year.
Nevertheless, NVDA has the potential to substantially increase its H100 shipments in the coming year due to the supportive efforts of its supply chain partners alongside the introduction of upgraded chips. Reinforcing this optimism, the semiconductor maker projects fourth-quarter fiscal 2024 revenues to hit $20 billion.
However, investors must remain aware of the potential impact geopolitical tensions may have on NVDA's ability to maintain its powerful performance. Historically, China has been a major customer for NVDA, holding over 90% of China’s $7 billion worth AI chip market. U.S. export restrictions on high-end chips to China puts approximately $5 billion worth of orders at risk.
Also, NVDA currently trades at a forward non-GAAP P/E ratio of 40.09, illustrating that investors are paying a significant premium, potentially valuing the company’s stock. The forward PEG ratio of 0.95 can appear deceptively enticing, as though the stock is fairly valued; it simultaneously intimates that any downward revisions to the EPS might precipitate a substantial drop in stock value. So far, analysts have revised EPS estimates upwards. However, it should be noted that this trend may take a U-turn if these predictions fail to materialize fully.
PATH, identified as a forerunner in the workflow automation and process optimization space, effectively helps streamline manual operations via a user interface (UI) and application programming interface (API)-based automation.
PATH continues to incite discussion around its potential affiliation with GenAI and the implications this could have on its business growth or reduction. On the one hand, the prospective integration of gen AI into PATH's pre-existing platform is considerable. Equally compelling, however, is the suggestion that such AI technology could simplify some of PATH's specialist offerings.
The company announced the implementation of several AI-powered services to spur significant growth in its revenue by 2024. These advancements include enhanced features for their existing AutoPilot services and augmented cross-platform connectivity capabilities.
AutoPilot for Assistant, an AI auxiliary tool, is tasked with facilitating daily to-do lists. It employs cutting-edge GenAI alongside Specialized AI to ensure secure interaction with various systems and documents. Moreover, AutoPilot for Studio could augment productivity among seasoned professionals and novice developers by allowing them to integrate natural language into their projects.
The firm's PATH Clipboard AI achieved notable recognition in November 2023 when it was awarded a place amongst TIME's Best Inventions of 2023 in the Productivity segment. This notable AI tool eradicates the need for labor-intensive manual copy-pasting tasks, significantly streamlining productivity.
Longer-term projections see PATH well positioned to develop a foundational model designed to comprehend processes, tasks, screens, and documents – a method that drives automation.
Moreover, the software enterprise reported a robust fiscal result in its third quarter that ended November 30, 2023, leading it to achieve significant expansion in December. The dollar-based net retention rate during this period was an impressive 121%, indicating that existing customers had increased their purchases from PATH by 21% compared to the year-ago quarter – a testament to PATH's beneficial automation suite.
Initial indications suggest that GenAI may not overcome more potent task-specific platforms such as PATH just yet. Meanwhile, PATH stands to direct GenAI toward a positive rather than negative impact. Long-term certainty is still elusive, necessitating continuous innovation from PATH. Investors would do well to remain informed about the evolving AI narrative as it concerns PATH and other enterprise Software as a Service (SaaS) companies.
William Blair analysts initiated research coverage on PATH with an 'outperform’ rating. PATH focuses on complex, enterprise-grade processes, making its platform indispensable for its clientele. This is reflected by its high gross retention rate of 97%.
Analyst forecasts indicate a strong showing for PATH over the following years with continued growth and margin expansion. Furthermore, analyst Jake Roberge predicts an increase in the company's EBITDA from $84 million in 2023 to a staggering $223 million in 2024 and up to $280 million by 2025.
