The U.S. stock market has been in an impressive bull rally for the past year and a half, despite a slowing economy, high inflation, and mounting geopolitical pressures. The technology-heavy Nasdaq Composite index posted a remarkable 43% gain in 2023, driven mainly by the artificial intelligence (AI) trend. The trend seems to have persisted, and the Nasdaq Composite is up by 14% so far in 2024.
Investors may now feel uncomfortable picking up high-flying Nasdaq stocks after such an exceptional rally. However, some of these AI-powered companies are dramatically reshaping industries with their technological innovations and can be smart picks for astute retail investors even at elevated share prices. Here's why Nvidia (NVDA 4.45%) and Meta Platforms (META 0.90%) fit the bill.
Nvidia
It's no surprise that semiconductor giant Nvidia is on this list. With its comprehensive portfolio of cutting-edge CPUs, GPUs, and superchips (GPUs + CPUs), a robust software ecosystem, and strong partnerships with technology titans, the company emerged as one of the major beneficiaries of the ongoing AI boom.
The dramatically rising demand for Nvidia's full-stack AI computing platform was pivotal in driving its data center revenue by an explosive 427% year over year to $22.6 billion in the first quarter of fiscal 2025 (ending April 28, 2024). Data center business now makes up nearly 87% of the company's total revenue and shows no signs of slowing -- especially in the backdrop of rising adoption of generative AI technologies and large language models.
Cloud service providers, technology titans, and start-ups are heavily investing in large language models (LLMs) for content creation, chatbots, code generation, and more. Training and inferencing LLMs requires a huge amount of computing power, and Nvidia's recently introduced H200 and next-generation Blackwell architecture chips seem ideally positioned to cater to these needs. Nvidia, however, expects the supply of H200 and Blackwell chips to fall short of demand until the next year -- thereby giving the company significant pricing power.
While the supply/demand mismatch may theoretically open up an opportunity for competitors like Advanced Micro Devices and Intel, Nvidia can still protect its turf owing to technological superiority and well-established strategic relationships with clients. The company accelerated the pace of launch for new chips from two years to one, which means its clients get access to the latest technologies much faster. It also helps that Nvidia's new chips are backwards compatible, and its software ecosystem works with both Hopper and Blackwell systems.
The company also introduced certain innovations to its Compute Unified Device Architecture (CUDA) software stack. The supporting software platform is optimized for accelerated computing across the company's hardware portfolio, which helped improve the performance and cost utilization of its blockbuster H100 chip in running inferencing workloads for certain models. All this helped Nvidia build a sticky customer base.
Trading at 36.7 times forward earnings, Nvidia is not a cheap stock. But the recently announced 10-for-1 stock split, effective June 10, 2024, will make the stock much more accessible to retail investors -- although it does not change anything fundamental about the company.
Considering Nvidia's prowess in capitalizing on the ever-expanding AI opportunities, its commitment to innovation, and increasing accessibility for retail investors, it can be a compelling pick in 2024.
Meta Platforms
Meta Platforms came out with impressive results for the first quarter (ending March 31, 2024), with revenue and earnings surpassing consensus estimates. However, since the results were declared on April 24, the stock has seen some pullback as investors are concerned about the company's higher expense outlook for the year. Despite this short-term hiccup, there is still a lot to like about this social media and digital advertising stock in the long run.
Nearly 3.24 billion people -- 40% of the global population -- use Meta's social media applications (Facebook, Instagram, WhatsApp, and Messenger) daily. This huge audience base gives Meta access to large amounts of personalized data. Meta is leveraging advanced AI technologies with this data to recommend more relevant and personalized content to users, which helps drive user engagement on its social media applications.
About 30% of posts on Facebook feeds and 50% of Instagram content is AI-recommended. A more engaged user base translates to more ad views, purchase conversions, and more revenue for Meta. This is evident considering the number of ad impressions on Meta's apps worldwide grew 24% year over year, while the average price per ad was up by 6% year over year in the first quarter.
Meta sees even more potential for content personalization by using a unified AI-based recommendation system across all its applications and all content formats (Reels, long-video format, Stories, Feeds), instead of using individual AI models for different products. The company is testing the new model architecture and is seeing significant improvement in certain key metrics.
To support its investments in building AI infrastructure, Meta guided for capital expenditures (capex) of $35 billion to $40 billion in fiscal 2024 (up from its previous estimate of $30 billion to $37 billion). While the accelerated pace of capex may seem challenging in the short run, it can help Meta outpace AI competition in the long term. Meta also has the financial resources to support its plans, since it is highly profitable and free-cash-flow positive.
Considering these aspects, Meta is positioned to continue dominating the global digital advertising market, estimated to grow from $550 billion in 2023 to $1.36 trillion in 2033. It makes sense for retail investors to buy the dip in this solid stock.
