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AI took the investing world by storm in 2023. Which stocks gain from the trend in the new year


Think back to December 2022. Once high-flying technology stocks barreled toward their worst year since 2008 as the Federal Reserve’s aggressive rate-hiking cycle brought an end to the easy-money era that fostered what seemed like limitless growth. No one could have guessed it then, but the launch of ChatGPT in late 2022 sparked an artificial intelligence craze that provided the catalyst the market needed. Many on Wall Street have likened the moment to the launch of the iPhone or the 1990s PC craze. This first wave of AI benefited the major chipmakers underpinning large language models. Nvidia ‘s long history in intricate graphics processing units positioned itself as the poster child for AI . Other companies also joined the AI chipmaking ranks , including competitor Advanced Micro Devices . Meanwhile, megacap technology stocks Alphabet and Microsoft battled it out for the dominate AI chatbot , with Microsoft funneling another multibillion into ChatGPT maker OpenAI. Alphabet followed up with Bard later in the year. After a blowout 2023, it’s safe to say AI is here to stay. And, while many on Wall Street expect that excitement to continue into the 2024, the next wave of winners may begin to emerge as the craze broadens out beyond this year’s winners. “The breadth of AI is going to expand beyond a relatively select number of megacaps,” said Deepwater Asset Management’s Gene Munster. “From the highest level, investors are going to keep getting more excited because we’re going to see more tangible examples about how this can improve efficiency.” A year of expanding breadth Many analysts and investors on Wall Street see AI unfolding in several waves over the next few years, with the first period encompassing many of the infrastructure, cloud computing, data center and networking names that monopolized 2023. Between 2024 and 2025, Oppenheimer’s Bill Bird expects the second wave, to unfold, extending to software applications and companies such as Cloudflare , Amazon , Snowflake and Shopify to benefit. That’s followed by a gradual industry end-market adoption cycle beginning in 2026, the managing director of thematic research said in a recent note. Many on Wall Street view 2024 as a year of expanding breadth in AI investing and the overall market, although 2023’s winners will continue to ride the wave. UBS Asset Management’s Albert Tsuei expects a handful of undervalued and underappreciated companies in the software space to find their footing as the need for front office automation grows. He views Salesforce as an “underrecognized” AI player with improving profitability and a solid long-term strategy, along with HubSpot . Cybersecurity software companies such as Palo Alto Networks may also jump to the forefront of AI-focused investing as the era of complex cyber attacks continues to unfold. This year alone, popular casino companies such as MGM Resorts and Clorox suffered ransomware and data breaches . This, and the overall growth of AI will accelerate enterprise cloud workloads, forcing companies to prop up IT budgets to store data and buy new hardware, Tsuei added. “This is the easy peasy way to play this whole thing,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “AI in whatever incarnation exists needs tons of data. You’re going to need places to store it and I think that’s always a good bet. ” ‘Early in the AI gold rush’ Not everyone on Wall Street seems convinced that the world and market is ready just yet for the next AI wave, or that the run for Nvidia is over. “We cannot say for sure that NVIDIA will never encounter some sort of air pocket,” wrote Bernstein analyst Stacy Rasgon. “But we remain very bullish on the long term opportunity in front of them, and continue to believe that in 5 years or 10 years we will all be talking about an industry that is far larger than the numbers being bandied about today.” Although he foresees some broadening out in the AI space, tech investor Paul Meeks expects large language model training to dominate 2024, benefiting Nvidia, along with hyperscalers Microsoft , Alphabet and Amazon . “As we get beyond training large language models to inference, you start to open up opportunities for other companies,” he said. “But we’re so early in the AI gold rush.” To be sure, many on Wall Street expect AI to eventually reach the bubble status that befell the Internet craze in the late 1990s. The bursting of this so-called bubble will weed out the legitimate AI winners from the so-called fluff, although many aren’t forecasting one until 2025 and 2026 at the earliest. The likely victims: companies making “super cool” apps but struggling with profitability, Meeks said. “We’re far from crazy,” Munster said. “The topic of ‘are we in an AI bubble right now’ is a frequent topic. We’re not even close to it.” — CNBC’s Michael Bloom contributed reporting

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