Will Earnings From These 10 AI Stocks Live Up to the Hype?

What to watch for in Q1 reports from Nvidia, Microsoft, Amazon, Broadcom, and more.

Bella Albrecht 22 April, 2024 | 2:41PM
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Illustration of AI depicted by a robot in thought with red and green circuit wires extending from its head, representing the robot's cognitive process

Companies riding a wave of high hopes from the boom in artificial intelligence technologies have seen their stocks soar.

With tech companies gearing up to announce their first-quarter earnings, investors will look for which AI stocks are turning the hype into prospects for actual revenue and growth. This article highlights 10 AI-related stocks Morningstar analysts will be watching closely this earnings season, along with key AI-specific areas for each company.

Key AI Stocks to Watch

Adobe ADBE
Advanced Micro Devices AMD
Amazon AMZN
Arista Networks ANET
Arm Holdings ARM
Broadcom AVGO
Intel INTC
Marvell Technology MRVL
Microsoft MSFT
Nvidia NVDA


AI Stock Performance

In recent days, AI-related stocks have taken a sudden turn lower. But over the past 12 months, the Morningstar Global Next Generation Artificial Intelligence Index, which aims to reflect leading-edge AI technologies, has gained 60.56%. So far this year, the index is up 10.95%, roughly twice the overall market’s gain.

Far and away the biggest winner in the AI stock space has been Nvidia, up more than 200% over the last 12 months and 70% so far this year. Broadcom boasts a 102% rally over the past year and 13% so far this year.

Are There Undervalued Opportunities In AI?

Of the 10 companies highlighted here, six are fairly valued and three are overvalued, based on Morningstar’s fair value estimates. Only Adobe is undervalued. “Everyone is already focused on finding AI beneficiaries, and valuations reflect that,” says Morningstar director of equity research Eric Compton. “It is hard to find obvious undervalued names with exposure to this space. If anything, many names seem overvalued, and we believe growth would have to far exceed our current expectations to justify the valuations for many of the obvious AI-related names under our coverage.”

However, investors haven’t needed to find undervalued names to reap serious rewards from AI stocks. In April 2023, three stocks on the list were undervalued, four were fairly valued, and two were overvalued. (Arm, which had its IPO in September 2023, did not have a rating.) Over the past year, eight of the nine stocks (excluding Arm) outperformed the Morningstar US Market Index, which has gained 22.32%. The two names that were overvalued a year ago, Arista Networks and Nvidia, outperformed the market by more than double, with Nvidia returning more than nine times the market.

High Uncertainty Creates Challenges for Valuation

How well AI stocks can meet the hopes assigned to them will be a critical aspect of first-quarter earnings. For investors, challenges include high uncertainty around business lines and the opaqueness of revenue streams.

The degree to which companies can provide a clear window into AI prospects somewhat ties back to their products. Companies benefitting from AI typically fall into two buckets: hardware and software. Hardware companies, such as Nvidia and Intel, produce the chips that power AI systems. Software companies, like Adobe and Microsoft, develop and train the systems themselves.

“AI-specific revenues are easiest to track in the hardware names,” says Compton. “They have specific products tied to AI model training demand, and hardware names are currently benefiting the most in revenue growth.”

In the software space, Morningstar analysts say it is much more difficult to pick out what revenue is and isn’t AI-related, as many of these companies do not have exact disclosures. One reason is that they “remain in the experimentation phase as they try to figure out the exact use cases and revenue models for AI offerings, so there is not much to disclose,” Compton explains. Another reason is that “current AI offerings are simply additional functionality built into existing offerings, so trying to parse what is ‘new’ AI-related revenue and what isn’t is nearly impossible.”

This high degree of uncertainty is reflected in analysts’ Morningstar Ratings. Eight of the 10 stocks on this list have Uncertainty Ratings of High or Very High. The other two, Broadcom and Microsoft, have Uncertainty Ratings of Medium.

Here’s what Morningstar analysts say about these stocks ahead of their first-quarter earnings reports.

 

Adobe ADBE

  • Earnings Release Date: June 13
  • Fair Value Estimate: US$610.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 4 stars

“Shares began to slide in February 2024 when OpenAI announced its new Sora text-to-video model. It surely is impressive. However, Adobe announced a similar Firefly model in October 2023. Neither model is generally available yet, but Adobe’s should be within a few months. Firefly video is similarly impressive. Given the company’s already-strong position within the creative community, we see Adobe as maintaining its lead here.

“Shares of Adobe represent an attractive entry point in our view given the intersection of a wide moat and a meaningful discount to our fair value estimate. We think shares have retracted simply due to management’s poor handling of the basic question around the trajectory of net new digital media annual recurring revenue for the rest of the year, rather than a true near-term demand issue.”

—Dan Romanoff, senior equity analyst

 

Advanced Micro Devices AMD

  • Earnings Release Date: April 30
  • Fair Value Estimate: US$145.00
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Rating: 3 stars

“The single biggest driver of upside for Advanced Micro Devices, in our view, will be its progress in selling AI GPUs such as its MI300X product. Management’s initial guidance, which we thought was conservative at the time, was for US$2 billion in revenue in 2024, which the company has since raised to US$3.5 billion (and we model US$4 billion). Further upside is possible.

“On the other hand, AMD’s embedded business faces weakness due to soft telecom spending, gaming console chip revenue will pause, and it’s conceivable that some of this GPU spending could be offset by lower server CPU spending across the industry. This latter point could take the shine off any potential upside in GPU revenue.”

—Brian Colello, equity strategist

 

Amazon.com AMZN

  • Earnings Release Date: April 30
  • Fair Value Estimate: US$185.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 3 stars

“Amazon Web Services continues to stabilize as optimization efforts at customers wane and new workload migrations and other cloud initiatives like generative AI are driving new demand. Cloud optimization efforts are over and large deals are coming back. Management believes generative AI can add tens of billions of dollars to revenue over the next several years, which seems possible given the vagueness of the comment.

“Profitability has been surprising to the upside in recent quarters and we expect something similar this quarter. Last quarter we raised our longer-term margin outlook. The regional hub model has delivered more savings than anticipated thus far, which we don’t think ends overnight.

“Advertising has been strong, and as the retail business continues to recover, we expect advertising to remain strong in the near term, likely outperforming other large internet-based advertising peers.”

—Dan Romanoff

 

Arista Networks ANET

  • Earnings Release Date: May 7
  • Fair Value Estimate: US$195.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 2 stars

“Arista Networks has a significant opportunity in data center switching to support AI model training. It is the leader in high-speed data center switching, which is needed for AI. It has a wide moat from its proficiency here. It has targeted $750 million in AI revenue in 2025.

“We believe Arista Network’s AI opportunity is immense, and we have raised its valuation to reflect that. However, we believe shares are pricing in overly rosy expectations (and hype) about AI spending, and shares look out of reach to us.”

—William Kerwin, equity analyst

 

Arm Holdings ARM

  • Earnings Release Date: May 8
  • Fair Value Estimate: US$57.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 1 star

“Firms like Synopsys SNPS, Cadence CDNS, or Arm have a bright future as tool supporters of the AI ecosystem, but we don’t expect they will benefit from AI to the same extent that Nvidia does. While Nvidia’s costs to design a superchip like the Grace Hopper are higher than previous generations of GPUs, these have scaled much slower than prices, resulting in very high operating leverage. Put simply, Nvidia does not need to spend 50 times more in Synopsys software or pay 50 times more to Arm in royalties to design a superchip that sells for 50 times more. While Arm and other peers will gradually benefit from AI in the following years as ecosystem supporters, we expect their profits will grow more in line with revenue because they don’t have the same pricing power and operating leverage as Nvidia.”

—Javier Correonero, equity analyst

 

Broadcom AVGO

  • Earnings Release Date: June 12
  • Fair Value Estimate: US$1,090.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 2 stars


“Broadcom is the second-largest AI chipmaker by revenue to Nvidia. Broadcom has a large exposure to custom AI accelerators. It designs the Google GOOGL TPU, a custom chip for Meta Platforms META, and just announced an unidentified third large cloud customer. It also provides high-speed switch chips for AI training and inference.

“Broadcom notched nearly $4 billion in AI chip revenue in fiscal 2023 (October end) and is targeting $10 billion in fiscal 2024, which it recently raised from an initial target of $8 billion.

“We forecast immense growth for Broadcom’s AI chip sales, which we think will quickly approach a majority of its overall semiconductor sales. However, we believe to justify its current valuation, one would have to assume consistent 50% growth over the next five years for AI revenue—we’re closer to a 30% compound annual growth rate, tapering down toward the lower double digits by 2028.

“Broadcom’s non-AI chip markets are taking some hits in 2024, but its immense AI growth is offsetting weakness elsewhere.”

—William Kerwin

 

Intel INTC

  • Earnings Release Date: April 25
  • Fair Value Estimate: US$40.00
  • Morningstar Economic Moat Rating: None
  • Morningstar Rating: 3 stars

“Similar to AMD, we’ll be interested in Intel’s AI accelerator pipeline with its Gaudi products. The company introduced its latest version, Gaudi 3, in early April.

“Intel recently disclosed details into its revenue and operating income by segment, and Intel Foundry has incurred greater losses than what the market was expecting. We don’t anticipate a turnaround in Q1 results, but this will likely be an area of investor interest since a manufacturing turnaround will drive upside to the stock.

“We anticipate that Intel will continue to tout its PC AI CPUs for edge AI workloads. We’re not clear as to the potential timing, economics, or upside from this opportunity. AI may drive a PC refresh cycle but with no chip ASP uplift, or perhaps no PC unit upside at all but with higher chip ASPs. We remain interested in this topic.”

—Brian Colello

 

Marvell Technology MRVL

  • Earnings Release Date: TBA
  • Fair Value Estimate: US$65.00
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Rating: 3 stars


“Similarly to Broadcom, networking chip sales in any non-AI market are having a weak 2024 (with a January fiscal year-end, Marvell Technology’s fiscal year 2025 is roughly calendar year 2024.) Marvell’s AI sales growth is helping to offset the weakness in its other end markets.

“Marvell has an extremely strong position in optical transceiver chips that sell into data centers and AI networks. We expect strong growth for these sales as AI models and spending continue to grow. Marvell also has design wins for custom AI accelerators, including Amazon as one of its customers. We expect strong sales growth to accrete from these over the next two years.

“Marvell is modestly overvalued. It hasn’t traded up to the same extent of other AI networking plays Arista Networks and Broadcom, but we continue to think shares imply overly rosy expectations for growth, even against our forecast that we see as bullish.”

—William Kerwin

 

Microsoft MSFT

  • Earnings Release Date: April 25
  • Fair Value Estimate: US$420.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 3 stars

“Azure growth was 28% in constant currency in the most recent quarter, with 600 basis points coming from AI-related services. Guidance calls for the same level of growth this quarter, which was strong. Any modest upside here will likely be well-received. We doubt management will break out the AI-related growth again this quarter.

“Microsoft said the vast, vast majority of AI demand on Azure is for inference rather than model training. We think this was surprising to many, given the explosion of interest in generative AI. However, given that Microsoft has been offering AI and machine-learning services on Azure for years, it likely already generates billions of dollars in AI services, which would obviously be tilted toward inference. You train a model once and then infer with it until you release a new model a year later.

“Microsoft is releasing its Maia and Cobalt chips later this year. We think this is an important step in expanding the Azure AI Services menu but not likely to change the balance of power in cloud providers or likely to have a material impact on the chip providers.”

—Dan Romanoff

 

Nvidia NVDA

  • Earnings Release Date: May 22
  • Fair Value Estimate: US$910.00
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Rating: 3 stars

“Nvidia continues to sit at the epicenter of AI development. Demand for Nvidia’s GPUs continues to exceed supply and we anticipate that Nvidia’s revenue growth is locked in for the next few quarters as the ecosystem continues to increase supply. Any commentary to the contrary would be a surprise to us.

“Nvidia estimates that 40% of its GPUs are used in AI inference, which was a positive development in our view as inference might be a larger market than AI training. Any positive data points on this front might be well received again.

“Gross margins should remain stellar, but management hinted at a downtick later this year when its new Blackwell GPUs reach the market. We’ll be interested in the mix shift at Nvidia between its newest vs. prior-generation GPUs.”

—Brian Colello

 

The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Advanced Micro Devices Inc164.47 USD1.14Rating
Amazon.com Inc184.70 USD0.58Rating
ARM Holdings PLC ADR110.35 USD-3.43Rating
Microsoft Corp420.21 USD-0.19Rating
NVIDIA Corp924.79 USD-1.99Rating

About Author

Bella Albrecht  is an associate data journalist at Morningstar Inc. 

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