Al Root
The unfolding era of artificial intelligence is lifting Nvidia, the picks-and-shovels star of the current gold rush, as well as a host of other stocks, but that can't last forever.
There is no need to worry right now. Nvidia reported its second-quarter numbers Wednesday. Shares dipped following the report, but don't blame the results: Sales for the three months through July topped $30 billion for the first time, with a gain of 122% from a year earlier.
It was the fifth consecutive quarter with triple-digit year-over-year sales growth. Sales growth over the 12 months through July was almost 200%, and the figure for the coming 12 months is expected to be almost 60%.
Those amazing numbers depend on outlays by the largest technology firms, which are scrambling to build cloud-based infrastructure so they can offer AI services to consumers. Microsoft accounts for roughly 19% of Nvidia's sales, according to Bloomberg. Meta Platforms, Alphabet, and Amazon.com account for 10%, 7%, and 6%, respectively, bringing the combined total to 42%.
Those four companies are expected to spend some $207 billion on new equipment in 2024, up almost 40% compared with 2023 and up fivefold compared with 2017.
Wall Street doesn't see the party winding down soon, but it does expect it to end. The total is expected to rise 13% to 234 billion in 2025, but only 3%, to $243 billion, in 2026.
What does that mean for AI-related stocks? Given that the stock market is always forward-looking, it could put pressure on the sector in mid-2025, though that isn't inevitable.
The forecasts for spending in 2026 could understate what is really going to happen. Analysts may have simply plugged numbers showing growth going back to normal into their financial models, rather than forecasts reflecting an immense technological shift. Maybe capital investment by companies not named Amazon, Microsoft, Meta, and Alphabet can pick up the spending slack.
Although 2026 is still a long way off, investors should think about when spending growth will slow and what that will do for stock valuations.
Given all that, Barron's looked for the hardware and service stocks -- other than the established tech giants -- that mention AI the most in earnings conference calls. That is one way to get a sense of which companies stand to gain while the AI tide is rising, and which might be at risk when it goes out.
The 10 hardware-focused companies that rank highest on that metric, in no particular order, are HP, Cisco Systems, Applied Materials, Arista Networks, Intel, Advanced Micro Devices, Equinix, Qualcomm, Teradyne, and Micron.
The 10 service firms, also in no particular order, are NetApp, Salesforce.com, Synopsys, Palo Alto Networks, Intuit, Cognizant Technology Solutions, Mastercard, IBM, F5, and ServiceNow.
Of the 10 hardware-based AI plays, Arista, Equinix, and Micron are the most popular with Wall Street analysts. The average Buy-rating ratio for those three stocks is about 83%. far above the average of about 55% for companies in the S&P 500.
Of the 10 service-based AI plays, Synopsys, Mastercard, and ServiceNow are the most popular. The average Buy-rating ratio for those three is about 86%.
Of course, looking at how often companies mention AI on their conference calls isn't a tried and true investment strategy and doesn't measure up against factors such as whether profit margins are improving as a tool to assess the outlook for a stock. And Barron's decision to limit our list to 10 stocks in each category was a random choice, while we only looked at recent conference calls with the help of AlphaSense.
But our odd screen is a start, like all stock screens. After that comes the work of understanding and valuing companies.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 30, 2024 13:17 ET (17:17 GMT)
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