AI stocks have flown in 2023 and have driven the bulk of the stock market’s gains. The likes of Nvidia, Microsoft and Apple have enticed investors into buying shares, resulting in triple-digit gains for several of them. But with the rally cooling of late, now may be the time to buy some reasonably priced stocks.
An AI explosion
A tidal wave of AI adoption is coming that could wash massive gains into investors’ portfolios. Hence, the recent pullback in AI stocks could offer a good entry point for long-term investors. This bullishness is down to the investment thesis that AI implementation is set to explode globally.
This would unleash a flood of software and chip spending, which would benefit chipmakers such as TSMC and ASML, as cloud and data centre investments scale rapidly as well.
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As such, Wedbush believes that artificial intelligence may constitute up to 10% of IT budgets by 2024. This is up from the sub-1% figure today. Farfetched as it may seem, it’s worth noting that AI is beginning to permeate every industry, from manufacturing, to healthcare, and transportation.
Thus, companies that integrate AI into their offerings and operations could end up gaining major insights, efficiencies and competitive edges. Yet the valuations of AI-linked stocks such as Alphabet and Apple remain relatively discounted considering their massive potential.
Seeing the bigger picture
It’s Apple that looks rather intriguing. The world’s largest company disappointed in its recent Q3 earnings due to a poor outlook. Even so, the longer-term investment case with AI-related efficiencies and offerings doesn’t seem to have been baked into Apple stock.
According to several tech publications, Apple’s imminent iPhone 15 launch will include AI-enhanced features. The newest iteration should lean more heavily towards premium models with upgraded chips enabling advanced capabilities.
In fact, this will come at a perfect time as there are approximately 250m iPhones that are over four years old. And with the iPhone 15 set to introduce AI-powered photography, video, messaging and other creative applications, a slew of upgrades could boost sales for higher-end devices.
A must-have?
The potential boost AI can provide to businesses is immense. This ensures that spending on artificial intelligence will continue despite the tight macroeconomic environment. Quite simply, AI’s potential for unlocking efficiencies makes it not just a nice-to-have, but rather a must-have.
Therefore, companies failing to participate in the AI revolution may risk obsolescence. After all, Nokia‘s and BlackBerry‘s failure to adapt to the revolutionary touch screen ultimately led to their demise.
Despite the recent rally, the long-term potential for gains in several AI stocks could be lucrative. With companies such as Alphabet and TSMC still trading below their historical averages, this may be a once-in-a-lifetime opportunity to snatch those giants up before they truly take off.
Having said that, investors must also be wary of potential value traps. Some names such as C3 and Nvidia could be expensive and may be trading at valuations that don’t justify future earnings. For that reason, it’s crucial to know how to value a stock accurately.
As for others, investors will have to stomach volatility to realise the true potential of these conglomerates. The AI wave is just starting to form, and I think today’s prices may end up seeming cheap years from now.
