Shares of stock market favorite Nvidia (NASDAQ: NVDA) have surged almost 219% over the past year and have reached near-record highs. The semiconductor giant’s expertise in advanced GPUs and artificial intelligence (AI) software has positioned it as the outright leader in the AI market, resulting in a significant enhancement in its financial performance.
AI is undeniably the most significant investment trend in 2024. Many investors might feel like they missed out on the Nvidia surge, especially considering the company is currently trading at a forward price-to-earnings ratio of 33 times — much higher than the median semiconductor industry valuation of 19.4 times. These investors can explore purchasing stakes in other high-quality AI stocks with relatively reasonable valuations, such as Microsoft (MSFT 1.55%) and Intel (INTC 1.91%).
Here’s why these two stocks are appealing picks in 2024.
Technology powerhouse Microsoft has delivered outstanding results for the second quarter of fiscal 2024, exceeding consensus estimates for both revenue and earnings. Not surprisingly, AI has been a significant driving force for the company.
Microsoft’s Azure cloud computing platform is the primary growth engine, with revenue increasing by 30% year over year (including a six percentage point boost from AI services) in the second quarter ending Dec. 31, 2023. In comparison, revenue from major competitors such as Amazon‘s AWS and Alphabet‘s Google Cloud grew year over year by 13% and 26%, respectively, in the most recent quarters. Azure has also secured larger and longer-term deals, including billion-dollar-plus commitments. This will ensure that the business can maintain its stability even during challenging times.
Azure is also rapidly becoming an ideal cloud computing platform for AI workloads, thanks to its exceptional performance in training and inferencing of large language models. Microsoft offers customers a diverse selection of AI software models and AI hardware (from multiple chip players) to choose from, all integrated deeply with Azure infrastructure, data, and tools. The company has already built a base of 53,000 Azure AI customers, one-third of whom have joined the Azure platform in the past 12 months.
Another major growth catalyst for Microsoft is the AI-powered assistant CoPilot embedded in multiple Microsoft products such as the Microsoft 365 productivity suite, GitHub, and Microsoft security platform. The company anticipates that the rapid adoption and monetization of CoPilot will lead to a significant improvement in average revenue per user in the coming years.
In addition to the multiple AI tailwinds, Microsoft’s core PC and gaming businesses are also poised for recovery in 2024. The company’s productivity and business processes division has returned to double-digit growth in the past few quarters.
Microsoft currently trades at a price-to-sales (P/S) ratio of 13.3 times, which is quite costly compared to the software industry’s median valuation of 2.2 times. However, considering the company’s strength in the AI market and improving IT spending trends, this leading consumer and enterprise software company can prove to be a wise buy in 2024 — even at the current elevated price levels.
Semiconductor giant Intel has seen its shares plummet by nearly 13.4% after posting mixed fourth-quarter 2023 results on Jan. 25. While the company’s revenue and earnings surpassed consensus estimates, its earnings guidance for the first quarter of fiscal 2024 fell significantly short of analysts’ expectations. Intel has attributed the weak outlook to temporary headwinds in the Mobileye autonomous driving business, PSG (Programmable Solutions Group), and Intel Foundry Services businesses. Despite these setbacks, there are a few positives for this stock.
The PC market seems to be recovering in 2024. IDC expects the total PC market to grow 3.4% year over year in 2024 — driven by the PC refresh cycle to replace the aging installed base of commercial PCs and upgrade to new PCs with integrated AI capabilities. With its market-leading position in the client PC market, Intel is well-positioned to capitalize on this trend.
Intel is also making rapid progress in the AI PC market with its Core Ultra client processors — also known as Meteor Lake. These processors have been designed to run low-power computations for AI workloads on client PCs. The company has partnered with over 100 independent software vendors and plans to release over 300 AI-accelerated software features optimized for its AI PCs through 2024.
Additionally, the company’s partnerships with multiple PC manufacturers will also play a pivotal role in driving the adoption of its AI PC systems. Intel expects to ship 40 million AI PC systems in 2024, to be used in over 230 designs from ultrathin PCs to hand-held gaming devices. Even without a significant impact from AI PC systems, Intel’s client computing business saw a healthy 33% year-over-year jump in revenue to $8.8 billion in the fourth quarter.
Intel also views its foundry business as a major growth catalyst and expects to become the second-largest foundry by 2030. Although the business presently focuses on traditional chip packaging, Intel anticipates its wafer manufacturing and advanced chip packaging to generate substantial revenue in the coming years. This will be driven by the increasing global adoption of AI technologies, which require a secure and sustainable supply chain of AI-optimized chips. Intel’s foundry business has already secured commitments from multiple clients and has a disclosed total deal value pipeline of over $10 billion. In the fourth quarter, foundry services posted a solid 63% year-over-year increase in revenue to $291 million.
Intel is currently trading at a P/S ratio of 3.5 times, much lower than that of peers such as Nvidia and Advanced Micro Devices. Therefore, considering the strong tailwinds and reasonable valuation, Intel may be a smart AI long-term purchase — even if the stock faces some choppiness in the short run.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.