Year-end review of US AI stocks: "Shovel Seller" NVIDIA emerges as the biggest winner, US stocks still need to pay attention to AI trends next year

AI stocks are one of the hottest investment themes on Wall Street in 2023.

Despite the impact of higher interest rates in the second half of the year, overall, AI stocks have outperformed the market significantly this year.

As of the time of writing, driven by the outstanding performance of individual stocks such as NVIDIA (NVDA.US) and Meta Platforms (META.US), the overall ChatGPT concept stocks have risen by over 72% this year. In comparison, the benchmark S&P 500 index in the US has risen by 25% year-to-date, the tech-heavy Nasdaq index has risen by over 44% year-to-date, and the Dow Jones index has risen by nearly 14% year-to-date.

Next, let's review the performance of AI stocks in 2023.

Overall Performance Review

Since the launch of the Microsoft (MSFT.US)-backed OpenAI chatbot ChatGPT in November last year, the wave of generative AI has swept the global market. Tech giants such as Meta Platforms and Google (GOOGL.US) have also joined the battlefield. The continued strong demand for AI chips has propelled NVIDIA to achieve explosive performance, adding fuel to the AI frenzy.

Despite the cooling of investor enthusiasm for AI stocks in the second half of this year due to the shadow of higher interest rates, AI stocks have still achieved strong gains this year.

As of the time of writing, the overall ChatGPT concept stocks have risen by over 72% this year, significantly outperforming the three major US indices. Data shows that the S&P 500 index has risen by 25% year-to-date, the tech-heavy Nasdaq index has risen by over 44% year-to-date, and the Dow Jones index has risen by nearly 14% year-to-date.

Specifically, ChatGPT concept stocks have outperformed the three major US indices in each quarter this year, with particularly outstanding performance in the first half of the year.

In the third quarter of this year, the US stock market was hit by the rise in US Treasury yields. Due to the expansion of US government debt, credit rating agency Fitch announced a downgrade of the US sovereign credit rating on August 1, pushing the yield on the 10-year US Treasury bond from 3.97% on July 31 to 4.34% on August 21, an increase of nearly 40 basis points.According to the data, in the third quarter of this year, the S&P 500 index fell by 3.65%, the Nasdaq fell by 4.12%, and the Dow Jones fell by 2.62%. In comparison, ChatGPT concept stocks were more resilient, with a decline of 1.1% in the quarter.

Entering the fourth quarter, with the continuous heating up of the expectation of a "soft landing" in the US economy, ChatGPT concept stocks rose by nearly 16%, outperforming the three major US indices, although the lead was not as strong as in the first half of this year.

Overall, the performance of ChatGPT concept stocks this year is superior to the broader market. This sector is more resistant to decline in adverse conditions and has stronger rebound momentum in favorable conditions.

Key stocks and application directions

The AI boom has also driven the crazy rise of multiple stocks. Among them, NVIDIA's stock price has risen by as much as 239% this year, and Meta Platforms has risen by 198%. Palantir, C3.ai (AI.US), CrowdStrike, and others have all doubled their stock prices.

Currently, the highly sought-after AI stocks can be roughly divided into two categories: tech giants that use AI tools in many applications, such as Meta Platforms, Amazon (AMZN.US), Microsoft, etc., and companies that sell related hardware, software, and services, such as NVIDIA and C3.ai.

It is worth noting that the AI wave has also spread to fields such as biopharmaceuticals and network security, and many related stocks have won favor on Wall Street.

The following stocks and application directions have attracted market attention:

"The Strongest Shovel Seller" NVIDIA

Specifically, NVIDIA is undoubtedly the biggest winner of the AI boom. Due to the surge in demand for NVIDIA A100/H100 chips in various industries, the data center business has now become NVIDIA's core business, rather than the gaming business that relied on gaming graphics cards in the past.

The data shows that NVIDIA's total revenue in the third quarter doubled year-on-year, reaching $18.1 billion. Non-GAAP earnings per share were $4.02, both of which significantly exceeded analysts' expectations. Data center revenue in the third quarter reached $14.5 billion, an increase of approximately 279% compared to the same period last year.

NVIDIA expects total revenue for the fourth quarter of fiscal year 2024 to reach approximately $20 billion, surpassing market expectations of $17.9 billion.

The incredibly strong performance outlook indicates that NVIDIA is the "strongest shovel seller" in the field of AI core infrastructure.

In addition to NVIDIA, US chip manufacturers such as AMD and Broadcom have also benefited from the AI boom, with their stock prices rising by 130% and 105% respectively this year.Meta may reshape the advertising industry

With the help of the artificial intelligence boom, the stock price of Meta Platforms, the parent company of Facebook, has risen by nearly 200%. Among the "Big Seven Tech Giants" in the US stock market (Apple, Microsoft, Google, Tesla, NVIDIA, Amazon, and Meta Platforms), its growth is second only to AI chip leader NVIDIA.

Data shows that this tech giant's Q3 revenue reached $34.2 billion, a year-on-year increase of 23%, with earnings per share reaching $4.39, surpassing market expectations. Meta's advertising business revenue in the third quarter reached $33.6 billion, a year-on-year increase of 24%, almost double the growth rate of the first quarter.

Meta Platforms is currently testing more than 20 different new generative artificial intelligence features in its family of applications, including Facebook, Instagram, Messenger, and WhatsApp, which have a combined user base of over 3 billion. These new generative AI tools cover various mainstream application scenarios, from search and advertising to commercial information. Ultimately, Meta plans to apply these new generative AI tools globally.

Market optimism predicts that Meta's launch of new generative AI tools may reshape the entire advertising industry. With a user base of over 3 billion constantly attracting advertisers, coupled with the support of generative AI technology, Meta's advertising business is expected to continue expanding.

In addition, benefiting from the AI boom, tech giants such as Amazon, Microsoft, and Google have also seen significant increases in their stock prices, with gains of 83%, 59%, and 58% respectively this year. The market holds an optimistic view on the prospects of these tech giants using AI technology to boost overall performance.

The "Purest" AI Stock C3.ai

C3.ai is considered by some market participants as the "purest" AI stock. The stock has skyrocketed by 170% this year.

C3.ai is a SaaS company that enables enterprises to deploy large-scale AI applications. The company's tools help its clients accelerate software development, reduce costs, and mitigate risks. The company has also launched a generative AI suite.

It is worth noting that C3.ai has not yet achieved profitability. Concerns about its performance outlook have led to a significant decline in its stock price from its peak. The stock is currently trading at $30.23, down nearly 40% from its 52-week high set in June.

"AI+ Decision Support" Palantir

Compared to C3.ai, analytics software company Palantir (PLTR.US) has performed even better. The stock has risen by 174% this year.

Strong performance has supported the rise in Palantir's stock price. The company has achieved triple-digit profit growth for several consecutive quarters since the end of last year. Wall Street predicts that the company's earnings per share will increase by 312% in 2023.According to reports, Palantir is involved in a wide range of industries, including defense, intelligence, energy, automotive, data protection, healthcare, retail, and semiconductors. Palantir provides power for AI-assisted decision-making from the battlefield to the factory floor to outer space.

AI + Cybersecurity

The development of artificial intelligence technology has brought new security risks and threats, strengthening the huge demand for cybersecurity in various industries. Cybersecurity stocks have quietly risen.

According to Gartner's predictions, the cost of protecting networks from cyber threats will reach $215 billion by 2024, a 14% increase from the estimated $188 billion in 2023. Given that artificial intelligence is generating more cybersecurity issues, spending on security and risk management tools may continue to grow.

Against this backdrop, the PureFunds ISE Cybersecurity ETF (HACK), which tracks the U.S. cybersecurity sector, has risen 38% year-to-date, significantly outperforming the broader market.

Among them, cybersecurity service provider CrowdStrike (CRWD.US) has risen over 143%. The financial report shows that CrowdStrike's Q3 total revenue was $786 million, a 35% YoY increase, with diluted earnings per share of $0.82, both exceeding market expectations. The company also raised its full-year performance guidance.

In addition, Palo Alto Networks (PANW.US) has risen nearly 112% year-to-date, Zscaler (ZS.US) has risen over 100%, and SentinelOne (S.US) has risen over 91%. However, despite the significant increase in this sector, many individual stocks have yet to achieve profitability.

AI + Pharmaceuticals

In mid-year, the highly anticipated NVIDIA announced an investment of tens of millions of dollars in the pharmaceutical field, causing excitement among investors in the entire industry.

NVIDIA announced at the time that it would invest $50 million in the biotechnology company Recursion Pharmaceuticals (RXRX.US) to accelerate the development of the company's AI models for drug discovery. NVIDIA CEO Jensen Huang stated that generative AI is a revolutionary tool for discovering new drugs and therapies. Boosted by this news, Recursion's stock price surged nearly 120% at one point.

Investment bank KeyBanc recently released a report stating that there is a huge opportunity in the AI pharmaceutical field, "because these technologies can leverage large amounts of data, greatly expanding the evaluation channels for potential candidate products, and can also screen faster and earlier at lower costs of failure." The bank is optimistic about Abcellera (ABCL.US), Absci (ABSI.US), and Schrodinger (SDGR.US), giving them an initial "buy" rating.Rating.

It can be seen that the market's recent interest in AI pharmaceuticals has been reignited. In the past 5 trading days, the stock price of Absci has surged by 50%, while Schrodinger and Recursion Pharmaceuticals have seen gains of over 10%.

Summary and Outlook

Since the beginning of this year, driven by the AI boom, the US stock market has rebounded strongly.

Many companies have jumped on the AI bandwagon, stimulating stock prices to rise. However, many of these companies have not been able to achieve significant growth in performance through AI.

Considering the disruptive impact of artificial intelligence on various industries, it is not surprising that investors are chasing after AI stocks. However, AI technology is still in its early stages of development, and there is great uncertainty regarding the timing and effectiveness of its implementation. Investors still need to remain cautious about stocks that lack performance support.

Looking ahead, with the expectation of a "soft landing" for the US economy, several Wall Street investment banks predict that the US stock market will reach new highs next year.

Given that seven companies, including Microsoft and NVIDIA, have contributed to about three-quarters of the S&P 500's gains this year, the fate of the US stock market increasingly depends on whether a few tech giants can leverage AI investments to achieve higher profits.

Mark Lehmann, CEO of Morgan Securities, said, "We are getting closer and closer to the moment when companies claiming to be AI-related must start showing their profits." "Returns must come from companies that truly achieve higher profits."

Zacks also believes that AI will remain a key investment theme next year. As organizations incorporate AI as part of their digital transformation efforts and strive to remain competitive in the digital economy, spending on AI systems is expected to accelerate in the coming years. Zacks believes that Meta Platforms, Intel (INTC.US), NVIDIA, and UiPath (PATH.US) are expected to benefit from the AI spending boom in 2024.