While the Magnificent 7 technology stocks of Alphabet Inc. (NASDAQ: GOOGL), Amazon Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Meta Platforms Inc. (NASDAQ: META), Microsoft Corp. (NASDAQ: MSFT), Nvidia Corp. (NASDAQ: NVDA) and Tesla Inc. (NASDAQ; TSLA) leading the market higher in 2023, AI has also gotten a place in the spotlight.
Nvidia has been the S&P’s shining AI star, but other stocks like Advanced Micro Devices Inc. (NASDAQ: AMD) and even wild cards like software maker Palantir Technologies Inc. (NYSE: PLTR) have rallied on AI revenue.
Gone are the days when AI stocks' “potential” was enough to send a stock higher.
These days, investors are looking for actual AI-related revenue growth, as evidenced by Elastic N.V.’s (NASDAQ: ESTC) 37% gap higher following a better-than-expected earnings report.
Meanwhile, companies like streamer Netflix Inc. (NASDAQ: NFLX) and payment processing service PayPal Holdings Inc. (NASDAQ: PYPL) are embedding AI tools into their products, but it’s not clear their stocks are getting a boost from that alone.
Less well-known AI plays
But some little-known stocks such as Vertiv Holdings Co. (NYSE: VRT) and Super Micro Computer Inc. (NASDAQ: SMCI) are on the rise due to their AI-driven revenue.
Ohio-based Vertiv makes infrastructure gear for data centers. The stock is up 245.28% year-to-date, on a spectacular run that began in April.
Vertiv, with a market capitalization just shy of $18 billion, Vertiv is not yet part of the X&P 500, although it’s larger than industry peer and recent S&P addition Hubbell Industries Inc. (NYSE: HUBB).
As a component of the Industrial Select Sector SPDR Fund (NYSEARCA: XLI), Vertiv probably doesn’t immediately come to mind as an AI stock. However, its intricate cooling systems for servers are becoming increasingly necessary as more computing power is used for generative AI.
Triple-digit earnings growth
Since mid-2022, Vertiv’s revenue growth has picked up, and earnings were up at triple-digit rates in the past four quarters.
According to the third-quarter report from managers of the Baron Small Cap Fund, Vertiv’s “multiple has since expanded as investors gained confidence in the duration of the company’s growth trajectory as well as its ability to capture the massive investment cycle ahead.”
Analysts expect Vertiv to earn $1.74 this year, up 229%. Next year that’s expected to rise by another 27% to $2.21 per share.
The Vertiv chart shows the stock is relatively new, having gone public via a SPAC merger in February 2020, just in time to decline in the great Covid market pullback.
But as you’ve seen, it’s had plenty of time to strut its stuff as a market leader, with AI-related revenue looking pretty certain to continue.
Making the hardware for generative AI
Super Micro Computer stock is up 232.10% year-to-date. Like Vertiv, it’s also in the category of “picks and shovels” maker to the generative AI software industry. That analogy originated in the days of gold miners, when prospectors needed equipment to mine for gold.
While it wasn’t certain the prospectors would find gold, the companies selling picks and shovels generated revenue no matter the result of mining operations.
Super Micro makes high-end AI servers used in data centers. The company is signaling that AI is driving its revenue growth.
In the company’s most recent earnings release, CEO Charles Liang said, “Given my confidence in my team and the strong demand we are seeing for AI infrastructure and compelling new and upcoming compute and storage products we are now raising our fiscal year 2024 outlook to $10B - $11B in revenue.”
Orderly correction below August highs
Wall Street expects Super Micro to grow earnings by 48% this year to $17.47 per share, with forecasts of another 10% next year, to $19.29 a share.
The Super Micro Computer chart shows the stock correcting in an orderly fashion below an August high of $357.
According to analysts’ reports, Super Micro Computer customers include heavyweights Tesla and Meta Platforms, and the company has a longstanding partnership with Nvidia.
