2 AI Stocks to Buy Before They Rise Up to 95%, According to Select Wall Street Analysts

Investments in artificial intelligence (AI) stocks have picked up steam over the past couple of years. Companies across industries are increasingly opting for advanced AI technologies to generate cost efficiencies and improve productivity and decision-making. Subsequently, many of these companies expect to see growth in top-line revenue and bottom-line earnings in the coming years.

Still, stock investors should be wary of the euphoria surrounding the AI ​​industry. If they want to materially benefit from this secular trend, they should focus on AI-based companies with sustainable competitive advantages and solid financial resources. There are two such companies Advanced microdevices (AMD 0.34%) and Nvidia (NVDA 1.46%).

Here’s why market analysts expect these companies to prove exceptional AI stock picks over the long term.

Advanced microdevices: estimated growth potential of 76%

Chip designer Advanced Micro Devices reported impressive second-quarter data, with revenue and profits beating analysts’ consensus estimates. Analysts were also pleased with its Q3 2024 revenue guidance and increased full-year revenue outlook for its data center AI chip segment. Melius Research analyst Ben Reitzes set a $265 price target on AMD stock. The target implies a potential growth of 76% over the next year.

Nvidia is the undisputed leader in the data center AI market. AMD is working hard to capture a significant share of this high-margin market with its competitively priced and rapidly expanding portfolio of AI chips. The company has incorporated high-bandwidth memory capacity into its new Instinct MI300 GPUs, making them suitable for AI inference workloads. AMD reported quarterly MI300 sales that topped $1 billion for the first time in the second quarter. AMD has also significantly improved its ROCm software stack to support its hardware, making it easier for customers to train AI models on its platform.

AMD is also preparing to launch new AI accelerators with higher memory capacity and compute performance, such as the MI325X series later in 2024, the MI350 series in 2025, and the MI400 series in 2026. The recent purchase of 4.9 billion dollars of ZT System, a leading provider of AI infrastructure for hyperscalers, is expected to strengthen the company’s foray into the rapidly expanding AI market. The company also acquired Silo AI, Europe’s largest private AI lab, to gain access to top human talent in the AI ​​industry.

Elsewhere, AMD already enjoys a strong presence in the global processor market. The company is already seeing robust adoption of its fourth-generation EPYC server processors from cloud providers and large enterprises. The company also plans to launch fifth-generation EPYC processors in the second half of 2024, AMD accounted for 24.1% of the unit share and 33.7% of the revenue share of the data center processor market in the second quarter of 2024.

AMD’s gross margins were 53% in the second quarter, up 340 basis points year over year. The company expects its margins to continue to grow in the coming quarters as its share of the AI ​​market grows.

AMD stock trades at 10.9 times trailing 12-month sales, higher than its five-year average price-to-sales (P/S) ratio of 9.2. However, given the rapidly growing presence in the data center and server processor markets and improving margins, the premium valuation seems justified. Thus, the stock may prove to be an attractive pick even at current high price levels.

Nvidia: 95% forecast growth potential

A stock market darling, shares of semiconductor giant Nvidia have gained 159% so far in 2024. However, according to hedge fund manager Eric Jackson of EMJ Capital, the stock may reach $250 per share by the end of 2024, which which implies a potential for growth. of 95%. Jackson bases his claims on the fact that (until recently) Nvidia’s forward price-to-earnings (P/E) ratio has been lower than its average forward P/E over the past five years. Over the past five years, Nvidia’s forward P/E has exceeded 50 three times and hovered around 70 twice. Given Nvidia’s projected growth potential in 2025 and 2026, investor euphoria is likely to drive valuation levels closer to these peak levels in the coming months.

While Jackson’s forecast may seem overtly optimistic, investors’ optimism for the company is well-founded. Nvidia accounted for 92% of the US data center GPU market in early 2024 and 65% of the global data center AI chip market in 2023. The company’s full-stack platform approach, which includes a complete ecosystem of AI-optimized hardware chips and software systems, networking solutions and development frameworks are strengthening and expanding their reach in the AI ​​and high-performance computing markets. Additionally, strategic partnerships with tech titans such as Meta platforms, Amazonand Microsoft it also plays a key role in driving demand for the company’s advanced chips and networking components in areas such as data centers, healthcare, social networking and autonomous driving.

Nvidia enjoys significant pricing power for its AI chips, allowing the company to report impressive gross margins. The company’s flagship H100 chip currently sells for $25,000 per unit. Nvidia can also charge higher prices for its next-generation H200 and Blackwell architecture chips due to superior technology capabilities and an ongoing supply crunch. Therefore, the company’s profit margins may remain high in the coming quarters.

With all these factors in mind, it might prove a smart move to pick up at least a small stake in Nvidia stock now.