If only I could buy 1 "Magnificent Seven" AI stock in 2024, that would be it – The Motley Fool

Last year, many investors were very afraid of a recession. But the Federal Reserve Bank’s decision to pause interest rate hikes has many on Wall Street now calling for a so-called soft landing – or bringing inflation under control without triggering a recession.

There is more good news. While Nasdaq Composite has already gained 43% so far this year (as of Thursday’s market close), history suggests there’s more to come. Over the past 51 years, the Nasdaq has, on average, risen an additional 19% in the year following a market rally, suggesting there are likely more gains to come.

At the top this year were the so-called “Magnificent Seven” stocks. All are closely linked to artificial intelligence (AI) and all have outperformed the broader market by far:

  • Nvidia (NVDA -0.33%): Increase of 235%
  • Metaplatforms: Increase of 194%
  • Tesla: Increase of 107%
  • Amazon: Increase of 83%
  • Microsoft: Increase of 59%
  • Alphabet: Increase of 56%
  • Apple: Increase by 50%

Wall Street rarely agrees on anything, but most market watchers agree that one of the Magnificent Seven is best positioned to benefit from the rapid adoption of AI: Nvidia. While the stock has already risen sharply so far this year, the evidence suggests it could outperform over the longer term – and the stock isn’t as expensive as you might think.

Fluorescent letters AI centered over a multicolored virtual circuit board.

Image source: Getty Images.

AI is just one piece of a much larger puzzle

It’s worth stepping back for a moment to look at the bigger picture. While AI represents a huge opportunity for Nvidia, it is far from the only one. Twenty-five years ago, the company first introduced the modern graphics processing unit (GPU), which transformed the video game market by delivering lifelike images and replacing the boxy figures gamers expected. According to Jon Peddie Research (via Tom’s Hardware), Nvidia has used this early success to capture a dominant share in the discrete desktop GPU space, recently controlling more than 80% of the market.

Nvidia’s secret to success over the years has been its ability to adapt its technology to new and lucrative use cases. This all depends on parallel processing, or the ability to break large computational tasks into smaller, more manageable chunks.

The company soon discovered that the ability to process a variety of complex mathematical calculations could also be used in other computationally intensive use cases. Nvidia quickly developed solutions for a wide range of these applications, including cloud computing, data centers, autonomous driving and, more recently, AI. In addition, by continuously improving its technology and introducing software that makes its processors work even more efficiently, Nvidia created an economic advantage that the company maintains to this day.

The ability to change and constantly develop new use cases has helped the stock rise 12,380% over the last 10 years. That’s also why AI is just the latest in a long line of breakthroughs fueled by Nvidia’s technology, and why its processors are the gold standard in a variety of these use cases.

The numbers reveal it

You only need to look at Nvidia’s results to understand how important this technology was to the emergence of AI. In the third quarter of fiscal 2024 (ended October 29), Nvidia posted record revenue of $18.1 billion, up 206% year over year, while diluted earnings per share were $3.71 increased by 1,274%. Investors should not expect results of this magnitude to continue as the results are skewed by last year’s downturn. But it helps illustrate the increasing demand for Nvidia’s groundbreaking AI chips.

The company expects the current wave of growth to continue. For the upcoming fiscal fourth quarter, Nvidia is forecasting record revenue of $20 billion at the midpoint of its guidance, which would represent a 230% increase year-over-year. Management left no doubt that AI was behind its optimistic outlook.

Estimates vary widely, so it’s simply impossible to say with certainty how big the AI ​​market will ultimately grow, but even the more conservative estimates are a stretch. According to Bloomberg Intelligence, the generative AI market could grow to $1.3 trillion by 2032 and achieve a compound annual growth rate (CAGR) of 42%.

According to New Street Research, Nvidia was already the undisputed leader in machine learning (a former branch of AI), with a 95% market share.

As a leading provider of all types of AI solutions, Nvidia has the most to gain from this secular tailwind.

Growing in all directions

AI is not the only potential growth driver.

Due to economic headwinds, the gaming market experienced an unusual slowdown in growth, but it is easing. According to market researcher Mordor Intelligence, the global gaming GPU market is expected to grow from $2.7 billion this year to $11.7 billion in 2028, a CAGR of 34%. As an industry leader, Nvidia will continue to ride this wave.

Cloud computing adoption shows no signs of slowing as companies move more and more workloads to the cloud. All that information has to go somewhere, leading to increased investment in data centers – and the need for greater capacity and performance will only increase as more companies integrate AI into their operations. This, in turn, will drive the data center upgrade cycle. According to CFRA Research analyst Angelo Zino, Nvidia is estimated to have a 95% share of GPUs used in the data center market.

Additionally, the data center market will continue to grow and is expected to grow from $263 billion last year to $603 billion in 2030, a CAGR of 11%, according to Prescient and Strategic Intelligence Market Research. This highlights another big and profitable opportunity for Nvidia.

As a leading provider of processing solutions for gaming, cloud computing, data centers and AI, the future looks bright for Nvidia – and its investors.

It’s not as expensive as you think

Let’s talk about the elephant in the room, Nvidia’s valuation. The stock currently sells for 65 times earnings and 27 times sales, which might seem outrageous at first glance. But it doesn’t capture one important factor: growth. As noted, the company has delivered triple-digit growth in two consecutive quarters, which skews these metrics upward and makes the stock look extraordinarily expensive.

However, the very reasonable price-to-earnings-growth (PEG) ratio – which takes this growth into account – is less than 1, compared to more than 2 for the S&P 500which shows how cheap the stock really is.

There is no doubt that the increasing demand for generative AI will continue in the future. Add to that Nvidia’s dominance in gaming, data centers, and machine learning, and it’s clear that Nvidia is the Magnificent Seven stock to buy in 2024 if you can only buy one.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool has a disclosure policy.