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Nasdaq Composite Back in Action: 5 Top Picks

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The Nasdaq Composite is back in action after an astonishing rally in 2023. The tech-heavy index soared 43.4% last year, recording its best year since 2020. The index’s smooth rally suffered a small hurdle last month, although finally, it closed January on a positive note with a mere 1% gain.

However, the tech-laden index has regained momentum in February. Year to date, the Nasdaq Composite is up 8.3% compared with 6% gain of the S&P 500 and 2.5% of the Dow. Last week, the index advanced 2.4%, posting the fifth straight winning week and the 14th positive week in 15.

Explosion of Generative AI

The tech rally in 2023 was led by a massive thrust toward AI, especially generative AI. Some financial and technology experts believe that AI is much-hyped and may lead to a bubble. We believe that the AI-space is yet to unfold in the U.S. and international markets. Once that happens, it will generate huge business opportunities for technology companies to produce high-end products.

Moreover, the robust fundamentals of the U.S. economy reduce concerns of a near-term recession. Additionally, the blockbuster earnings in the last reported quarter of NVIDIA — the largest global manufacturer of generative AI chipsets — raised expectations of investors that the market for AI will show strong growth in the coming decade.

Taiwanese chipmaker Taiwan Semiconductor Manufacturing Co Ltd. — the world's largest contract chipmaker — recently projected more than 20% revenue growth in 2024 on booming demand for high-end chips used in AI applications even as the broader industry faces weak smartphone and electric vehicle sales.

Smart Devices Aiding Computing Demand

Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory, low power consumption, and better graphic processors and solutions, which bode well for the semiconductor industry.

The World Semiconductor Trade Statistics (“WSTS”) projects robust growth in 2024, with an estimated surge of 13.1% annually. As estimated by WSTS, global semiconductor sales should reach $588.4 billion in 2024.

Technology research and advisory firm IDC predicts 20.2% year-over-year growth in semiconductor sales in 2024, driven by demand from AI servers and end-point device manufacturers.

Grand View Research estimates that annual spending across AI hardware, software, and services will see massive growth of 820%, from $197 billion in 2023 to $1.8 trillion in 2030, implying an annual growth rate of 37% over that time period.

Future Catalyst

On Feb 9, the Biden administration announced an investment of $5 billion in a public-private consortium to support R&D activities in advanced computer chips. On Aug 9, 2022, President Joe Biden signed the CHIPS and Science Act. This legislation allots $50 billion to help computer chip manufacturers and ease the shortage of components vital for a range of industries.

The National Semiconductor Technology Center ("NSTC") was funded through this act with $39 billion allocated to chip manufacturers and $11 billion set aside for chip R&D purposes. The newly released $5 billion will also be given to NSTC as the government recognized NSTC as the centerpiece of the administration’s R&D efforts.

The Biden administration has expressed concerns that the United States had a 39% share of global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% at present.

Our Top Picks

We have narrowed our search to five Nasdaq Composite listed technology behemoth with solid exposure to AI. These stocks have strong growth potential for 2024 and have seen positive earnings estimate revisions in he last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research Inc. (AMZN - Free Report) is gaining on solid Prime momentum owing to ultrafast delivery services and a strong content portfolio. The strengthening relationship with third-party sellers is a positive. Additionally, a strong adoption rate of AWS is aiding AMZN’s cloud dominance.

An expanding AWS services portfolio is continuously helping AMZN gain further momentum among customers. Robust Alexa skills and an expanding smart home products portfolio are positives. AMZN’s strong global presence and solid momentum among small and medium businesses remain tailwinds.

Amazon has an expected revenue and earnings growth rate of 11.4% and 39%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last seven days.

Meta Platforms Inc. (META - Free Report) is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement for its offerings like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver. META is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook.

META’s innovative portfolio, which includes Threads, Reels, Llama 2, Ray-Ban Meta smart glass, and mixed reality device Quest 3 is likely to drive growth. Reels continued to impress across both Instagram and Facebook backed by growing adoption. People reshared Reels 3.5 billion times every day during the fourth-quarter.

Meta Platforms has an expected revenue and earnings growth rate of 17.4% and 31.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last seven days.

NVIDIA Corp. (NVDA - Free Report) is gaining from the strong growth of AI, high-performance computing and accelerated computing, which is boosting its Compute & Networking revenues. The datacenter end-market business is likely to benefit from the growing demand for generative AI and large language models using GPUs based on NVIDIA Hopper and Ampere architectures.

A surge in Hyperscale demand and a solid uptake of AI-based smart cockpit infotainment solutions are acting as tailwinds for NVDA. The collaboration with Mercedes-Benz and Audi is likely to advance NVDA’s presence in the autonomous vehicles and other automotive electronics space. We expect NVDA’s revenues to witness a CAGR of 53.7% through fiscal 2024-2026.

Zacks Rank #2 NVIDIA has an expected revenue and earnings growth rate of 54.7% and 64.4%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last seven days.

Microsoft Corp. (MSFT - Free Report) has gained from strong Intelligent Cloud and Productivity and Business Processes revenues. Productivity and Business Processes revenues of MSFT rose due to a strong adoption of Office 365 Commercial solutions.

Microsoft 365 Consumer subscribers grew to 78.4 million. Continued momentum in the small and medium businesses, frontline worker offerings and a gain in revenue per user drove the top line. Intelligent Cloud revenues of MSFT were driven by growth in Azure and other cloud services. Solid adoption of Azure AI, which now has a clientele of more than 53,000 customers holds promise.

Zacks Rank #2 Microsoft has an expected revenue and earnings growth rate of 14.9% and 18.3%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the last 30 days.

Micron Technology Inc. (MU - Free Report) has enhanced its chip packages with AI, machine learning and deep learning. Using AI and analytics, MU has produced hardware with increased storage capacity, faster memory, and high-quality data filtering.

The expectation of supply normalization by mid-year 2024 is likely to drive pricing, while the boom in AI spending is expected to fuel demand for MU’s chips used in the data center end market. Additionally, 5G adoption in the IoT devices and wireless infrastructure is likely to spur demand for MU’s memory and storage.

Zacks Rank #2 Micron Technology has an expected revenue and earnings growth rate of 42.8% and 90.3%, respectively, for the current year (ending August 2024). The Zacks Consensus Estimate for current-year earnings has improved 2.3% over the last 30 days.

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