Introduction
Analysts at Melius Research are dismissing concerns and highlighting the potential for a further rally in technology stocks driven by the increasing investment in artificial intelligence (AI). In their research note, they identify Nvidia, Microsoft, and Apple as top picks in the AI sector.
Leading AI Picks
Melius analysts Ben Reitzes and Nick Monroe believe that Nvidia, Microsoft, and Apple are poised to benefit the most from the projected growth in AI spending, which is estimated to exceed $300 billion by 2026. They predict that these companies will double their share of IT spending as AI gains prominence. However, they express caution regarding potential disruptions faced by Google-parent Alphabet.
Strong Recommendations
Melius Research has issued Buy ratings on Adobe, Intel, Cisco Systems, and International Business Machines (IBM), on top of their top AI picks.
Nvidia’s Dominance in AI Development
According to Reitzes and Monroe, Nvidia is well-positioned to emerge as a winner in the long term due to its reliable semiconductors and CUDA software. These features make Nvidia the go-to platform for AI development.
Microsoft’s Increasing Share of the Software Industry
The analysts also anticipate Microsoft’s success in capturing a larger portion of the software industry profits. With Office and Windows applications, Microsoft is expected to become the primary interface through which personal-computer users interact with AI.
Ratings and Targets
Melius Research assigned a Buy rating to Nvidia, with a target price of $625 based on a price-to-earnings multiple of 45 times their projected 2026 earnings. They also gave Microsoft a Buy rating with a target price of $430, using a multiple of 33 times their forecasted earnings for 2025.
Stock Performance
At the time of this writing, Nvidia shares had risen by 0.5% to $467 in premarket trading on Tuesday. Meanwhile, Microsoft experienced a slight decline of 0.4%, reaching $344.30.
Apple and Alphabet: The Battle of AI
Apple and Alphabet, the parent company of Google, are both vying for dominance in the field of artificial intelligence (AI). While Apple has not been considered a frontrunner in this area, industry experts believe that may soon change as the demand for AI-powered applications on iPhones grows.
In fact, Alphabet already pays a staggering $20 billion annually to be the default search engine on Apple’s Safari internet browser. This demonstrates the value of Apple’s “mobile real estate” and suggests that the company could secure even more compensation from Google and/or Microsoft in the future.
Analysts Reitzes and Monroe are bullish on Apple, initiating coverage with a Buy rating and setting a target price of $240, representing a multiple of 33 times their estimated 2025 earnings for the tech giant. Despite this positive outlook, Apple shares were trading slightly down at $193.80 in premarket trading.
On the other hand, Melius analysts express more skepticism towards Alphabet. They highlight the potential threat that AI poses to the traditional search model and the increasing costs associated with maintaining Google as the top search option on mobile devices.
While Melius believes that Google deserves a modest premium compared to the market, they suggest that it should trade at a discount to rivals Apple and Microsoft due to uncertainties surrounding its growth prospects in search. Consequently, Melius initiates coverage on Alphabet with a Hold rating and a target price of $147, assuming an earnings multiple of 20 times their projected 2025 earnings. Alphabet saw a minor increase in premarket trading, rising 0.1% to $124.76.
In addition to these tech giants, Melius also highlights Adobe as a clear winner in generative AI. The company’s ability to use commercially safe content and provide indemnification to its customers has allowed Adobe to gain momentum in this space. Moreover, the analysts express positivity towards three non-consensus large-caps: Intel, IBM, and Cisco. They believe that these companies will benefit from an “AI Halo Effect” in the next year, which will drive IT spending and consequently boost the sales of PCs, servers, networking, and consulting services.
In conclusion, the battle for AI dominance is heating up between Apple and Alphabet. While Apple is expected to gain ground as iPhone users demand more AI capabilities, Alphabet faces uncertainties regarding the future of its search model. In addition to these tech giants, Melius identifies Adobe, Intel, IBM, and Cisco as potential winners in the AI space.
