In 2024, a smaller club of elite stocks has emerged: The AI 5.
It's yet another example of Wall Street's fascination with abbreviations, a trend that stretches as far back as the 1960s. Recall the so-called Nifty Fifty. This group of highly-touted 50 large-cap stocks regularly traded at price-to-earning ratios of over 50.
Decades later, we have FAANG, MAMA ANT and The Magnificent Seven.
But Light Street Capital's Glen Kacher coining the term "AI 5" is especially prescient considering artificial intelligence (AI) is the leading force behind the bullish market run nowadays.
Here's a look at the AI 5 members:
Nvidia
Nvidia Corporation (NASDAQ: NVDA) is considered the global leader in high-end graphics processing units (GPUs). Its trajectory has also evolved with the surge in demand for GPU applications in AI and machine learning.
Nvidia witnessed a significant boost in the 2010s when cryptocurrency miners turned to GPU hardware, leading to a skyrocketing demand. However, it was the integration of GPUs in training AI models that propelled the Jensen Huang-led company to new heights, as the market recognized the pivotal role of this technology.
Nvidia's surge is fueled by its incredible financial performance, owing to the accelerating adoption of AI across various sectors, including cloud providers and governments, which contributes significantly to Nvidia's growth. A multi-billion order from Meta for 350,000 H100 GPUs is just one of the showcases of the company's deep entrenchment in the tech industry.
Microsoft
Microsoft Corporation (NASDAQ: MSFT) is known for its Windows operating system, Office suite, LinkedIn, and Xbox gaming platform. The Redmond, Washington-based tech giant's stock returns exceeded 1,000% over the past decade.
A pivotal moment in Microsoft's AI journey was its $13 billion investment in OpenAI. This solidified its presence in the sector. The company's fiscal Q2 results highlighted robust revenues within its cloud computing segment, competing closely with tech giants like Amazon and Alphabet.
As AI continues to transform industries, Microsoft aims not only to create advanced systems but also to develop machines that surpass human capabilities in various tasks.
Under CEO and chair Satya Nadella, the company envisions an AI-infused future where every digital experience benefits from intelligent solutions. From personalized content recommendations to adaptive gaming experiences, Microsoft aims to reshape user interactions by weaving AI technology into various initiatives, including:
- GitHub Copilot
- Azure AI
- Microsoft AI Labs
- OpenAI Partnership
Advanced Micro Devices (NASDAQ: AMD) is a 1969 Silicon Valley company that evolved into a prominent semiconductor technology firm. It plays a pivotal role in shaping modern computing, with a focus on high-performance and adaptive computing solutions. Its journey has been marked by technological achievements, establishing itself as a key player in the data center, embedded systems, gaming, and PC markets.
In the rapidly expanding market for AI PCs, Advanced Micro Devices CEO Lisa Su is strategically positioning the company to compete with industry giants like Intel and fellow AI 5 member Nvidia.
The introduction of the MI300X chip, designed explicitly for AI computations, demonstrates its commitment to this emerging technology. With the capabilities to handle larger AI models and competitive memory specifications, the MI300X positions Advanced Micro Devices as a contender in the AI chip race.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Company, Ltd. (NYSE: TSM) provides a suite of services including wafer manufacturing, wafer probing, assembly and testing, mask production, and design services. Founded in 1987, TSMC has been instrumental in advancing integrated circuits (ICs) used across diverse industries such as computer, communication, consumer electronics, automotive, and industrial equipment.
TSMC, currently under the helm of CEO C.C. Wei, plays a pivotal role in the continuous growth of the semiconductor industry. As the world becomes increasingly dependent on microchips, the demand for computing power embedded in devices with an on/off switch has reached unprecedented levels. The chip industry, once cyclical, is now a cornerstone of the global economy, manufacturing more transistors in 2021 than the combined quantity of all goods produced by all industries throughout human history.
AI is intricately linked with the success of the chip industry, creating a positive feedback loop. AI, dependent on chips, drives efficiency and intelligence in chip design through machine learning algorithms analyzing vast datasets.
TSMC also aims to produce chips with higher performance and lower power consumption. This aligns with a growing trend in AI hardware demand.
The company already generates 50% of its Q4 2023 revenues from 3nm and 5nm technologies, showcasing the escalating demand for its advanced offerings.
Broadcom
Broadcom Inc. (NASDAQ: AVGO) is a leading designer, developer and supplier of semiconductor and infrastructure software solutions. Established in 1961, Broadcom has evolved into a pivotal player in the semiconductor industry. The firm addresses diverse markets with its extensive product portfolio.
Broadcom's foothold in emerging AI capabilities helped propel its stock to all-time highs. The company's semiconductor solutions are integral to managing data in various applications, from enterprise and data center networking to home connectivity, broadband access, and telecommunications equipment.
The Palo Alto (NASDAQ: PANW), California-based company holds chip supply agreements with Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Meta (NASDAQ: META).
Does Buffett Own Any 'AI 5' stocks?
Warren Buffett has $117 billion invested in two of The Magnificent Seven stocks: Apple and Amazon (NASDAQ: AMZN). While both companies already use AI, Apple is possibly leading on that front. Still, Buffett, who started buying Apple in 2016, didn't do it for AI, but rather for its quality product and brand power.