The recent rally in AI stocks has been the talk of the town these days. OpenAI’s impressive ChatGPT large language model (LLM) has opened the door to excitement. Indeed, many of us have taken the time to familiarize ourselves with generative AI. Through our many suggestions, we have seen what LLMs are truly capable of, even with sometimes restrictive guardrails. As AI technology continues to advance, there is a possibility that LLMs like ChatGPT will take more time into our daily lives. Furthermore, the advent of new plug-ins related to artificial intelligence could change the way we carry out our daily activities.
As exciting as LLMs are, investors must never lose sight of valuations. Also, ChatGPT might be the top technology today, but it is still unclear whether it will be the best LLM in the near and distant future. Sometimes, it’s hard to tell which companies will get the lion’s share of the pie. At this juncture, it appears that OpenAI has what it takes to be the number one player now and for years to come.
So what is the best way to bet on artificial intelligence? Keep an eye out for new AI technologies and be ready to pounce if the market still doesn’t realize its potential. In this article, I’ll use TipRanks’ comparison tool to track three AI stocks I’d keep an eye out for.
Alphabet (NASDAQ:GOOGL)
Even before the ChatGPT frenzy, Alphabet is a FAANG behemoth that has long been regarded as a powerful force in AI. Undoubtedly, LLMs have investors at heart, but ChatGPT could very well be the first of many deeply powerful technologies we will need to learn the ropes with.
Alphabet’s consumer-facing LLM Bard is an intriguing response to ChatGPT. While it’s hard to say which technology is superior right now (the two LLMs have their own unique strengths and weaknesses), I think the odds of Alphabet making a better LLM than ChatGPT are pretty high. For this reason, I remain bullish on GOOGL stock.
Shares of Alphabet participated in the so-called AI rally, peaking after an upbeat I/O event that unleashed a surge in AI potential. That said, I’d say the AI innovator still looks relatively cheap compared to other tech companies with comparable (or even lower) AI capabilities.
At the time of writing, GOOGL shares are trading at 28.7 times its price/earnings (P/E) ratio or 22.8 times its forward P/E. I believe a P/E multiple in the 20s is not indicative of a bubble. In that regard, I still consider Alphabet relatively undervalued in the AI universe.
Sure, Alphabet is a behemoth that we’re all familiar with, but it shouldn’t be seen as a market leader that’s just about to be discontinued from here. If any company can disrupt the current state of Google Search, it’s Google with artificial intelligence.
What is the price target for GOOGL stock?
Analysts have a Strong Buy rating on the stock, with 29 Buys and two Holds. GOOGL’s average stock price target of $130.77 implies 5.6% upside potential from here.
Nvidia (NASDAQ:NVDA)
Nvidia is the mainstay of the GPU (graphics processing unit) that enjoyed explosive demand for its products during the so-called “AI gold rush”. It seems there aren’t enough GPUs to meet the needs of businesses who know they need the hardware horsepower to keep up with the latest and greatest in AI technology.
As companies continue to stockpile Nvidia GPUs, demand is likely to outstrip estimates. As the tides turn, however, there’s a good chance that demand could plummet after the latest boom. For Nvidia shareholders, that could mean a sudden forgoing of recent earnings. Now up a staggering 187% year-to-date, I’m neutral on the stock, entirely due to the price of admission, which is above and beyond what I’d be willing to pay.
Still, Nvidia is likely to remain the heavyweight champion in the AI race, and it’s a worthy newcomer to the $1 trillion market cap club. As the company rolls out new chips tailored to AI, one has to think that companies will be quick to resubmit their bulk orders.
While I consider the rise of AI sustainable, I’m not so sure when the next round of crises will come. Large hardware products can be quite cyclical. In this regard, I would much rather wait for the stock to fall than “chase” it near the $400 level.
Recently, Nvidia seems to be partnering with capable companies while betting on other AI competitors in the space (think Cohere). As the company increases its exposure to AI, it’s tempting to be optimistic about the company. However, the stock is simply too hot for most value hunters to handle.
What is the price target for NVDA stock?
I’m not comfortable with Nvidia’s valuation, but many analysts think the good times will keep coming. The stock has a Strong Buy rating, with 32 buys and four holds. NVDA’s average stock price target of $449.92 implies 9.7% upside potential from here. Perhaps it’s not too late to enter the GPU leader, at least according to analysts.
Broadcom (NASDAQ:AVGO)
Broadcom has enjoyed a huge AI-led spike, driving the stock up a whopping 54.9% year-to-date. Undoubtedly, the opportunity to buy the stock with a 4% yield and a P/E in the teens is over, but that doesn’t mean Broadcom’s glory days are over.
The stock added another 6.3% on Monday, taking the shares above the $850 mark, thanks to EU regulatory approval to acquire software company VMWare (NYSE:VMW) for $61 billion. As the deal nears the finish line, it’s hard not to get excited about Broadcom as a catch-up game to win the AI race on the hardware and software fronts (the VMWare deal gives Broadcom quite a “moat” in the visual software space).
With a price-to-earnings ratio 26.5x lower, Broadcom looks like a basement stock compared to Nvidia. As a reasonably priced chip name with a relatively high dividend yield (2.3%), AVGO stock strikes me as one of the high-momentum stocks I wouldn’t be afraid to “chase.” Therefore, I remain bullish on Broadcom, as the $1,000 mark seems in sight.
What is the price target for AVGO shares?
Broadcom is a strong buy on Wall Street, with 14 buys and two suspensions awarded in the past three months. However, AVGO’s average share price target of $860.93 implies only 1.2% upside potential.
Conclusion for AI investors
Perhaps a technology we haven’t heard of yet, or a competing offering (think Bard or Bing), could be the LLM that outperforms ChatGPT. Either way, investors should feel comfortable with the idea of diversifying their AI bets. There will be some big winners, but I don’t think it’s that easy to tell at this juncture.
Disclosure
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