Why artificial intelligence (AI) stocks rallied on Thursday Arm Holdings, Microsoft and Broadcom

The mad race to adopt artificial intelligence (AI) began in earnest early last year, generating impressive gains for those companies best positioned to take advantage of this major shift in technology. The resulting bull run among AI stocks helped support the ongoing market rally.

In recent weeks, however, some investors have begun to fret, wondering how long this relentless race could last and looking for evidence that the AI ​​revolution was intact. Results from the AI ​​poster, Nvidia (NVDA -4.47%)provided some answers.

With that as a background, chip designer Arm holds (ARM 6.78%) up 6.7%, software and cloud specialist Microsoft (MSFT 1.47%) rose 2.3%, and the AI ​​chip specialist Broadcom (AVGO 0.91%) was up 2.1% as of 12:32 a.m. ET Thursday.

A check of all the usual sources — changes in analyst estimates, earnings results and regulatory filings — turned up nothing in the way of company-specific news to help boost stocks in the space. That said, there was one obvious catalyst that helped spark a rally in AI stock values.

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Solid results powered by AI

Chipmaker Nvidia released its quarterly financial report after the market closed yesterday, and by most measures the results were superb.

For the second fiscal quarter of 2025 (ended July 28), Nvidia generated $30 billion in revenue, up 122% year-over-year and 15% sequentially. This generated adjusted earnings per share (EPS) of $0.68, which was up 152% year-over-year and 11% sequentially. For context, analysts’ consensus estimates were calling for revenue of $28.7 billion and EPS of $0.64, so Nvidia beat expectations on both counts.

That said, there were a few areas of note that investors may have had concerns about.

For the upcoming third quarter, the company expects revenue of $32.5 billion, an 80% year-over-year increase. While results of this magnitude would normally be cause for celebration, it’s a deceleration for the triple-digit year-over-year growth Nvidia has generated over the past five quarters.

Another area that is being watched closely is Nvidia’s gross margin. While the measure — which clocked in at 75.1 percent — was still historically high, it was down from the 78.4 percent the company delivered last quarter. Management attributed this to inventory dispositions for Blackwell processors and product mix, but investors hate uncertainty.

These minor quibbles aside, Nvidia’s results provide ample evidence that AI adoption continues apace, which bodes well for other companies buffeted by AI’s secular winds.

Why it matters

There is no doubt that generative AI has the potential to be transformative. These systems tend to automate mundane, time-consuming tasks, thereby increasing productivity. Our trio of stocks are each heavily invested in the success of AI:

• Arm Holdings created the blueprints for the next-generation CPU cores included in processors made by Nvidia and others, and are a critical element in AI systems.
• Microsoft was one of the first in AI software, creating Copilot, an AI-powered digital assistant deeply integrated into its cloud and software systems, designed to streamline processes, thereby saving time and money.
• Broadcom makes many of the semiconductors and other technologies used in data centers and cloud computing.

These companies cannot all be painted with the same brush, as each has a unique contribution to make to the AI ​​ecosystem. That said, some investors see them as part of the broader AI revolution.

Despite the recent uncertainty, these stocks still boast high valuations and are not for the faint of heart. Arm Holdings, Broadcom, and Microsoft trade at 85 times, 34 times, and 32 times forward earnings, respectively. Of the three, Microsoft and Broadcom are the least expensive, but all three deserve a premium commensurate with their industry position and the AI ​​opportunity. Investors just have to decide how high a price they are willing to pay.

Developers are just now coming to terms with the potential uses of artificial intelligence, and new applications are being discovered almost every day. Investors would do well to buy the best AI stocks they can find and hang on to for dear life.