Identifying great companies is important to increasing investment returns, but buying at the right price is just as important.
There are always hot topics in the investment world. Artificial intelligence (AI) is definitely a hot topic right now. Companies of all kinds are eager to show off their commitment to AI, whether or not it’s core to their business. That said, computers, automation, and technology in general power much of modern society, so it’s likely that AI will eventually impact all or most industries in some way.
This market-wide focus on AI is also driving up prices for the companies that stand to benefit most from rushing to bring more advanced versions of AI to market. Fear of missing out has driven some great companies into the valuation stratosphere. Here are three stocks investors should keep an eye on when the stock market crashes and prices become more affordable.
1. Nvidia
If there is one company that sparked the artificial intelligence boom in the stock market, it is Nvidia (NVDA 1.27%). It was Nvidia’s series of eye-popping quarterly results that made investors realize the opportunity to invest in AI in general. Nvidia has designed chips that have proven to be very good at developing AI, and as a result, demand for these chips is strong.
Nvidia’s overall revenue is experiencing explosive growth, but that growth is primarily driven by its data center division, with reported demand for chips used in AI. Not only has the segment’s revenue increased in each of the past five quarters, but its year-over-year (YOY) growth rate has also accelerated.
|
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|
|---|---|---|---|---|---|
|
data center revenue |
$3.6 billion |
$4.3 billion |
$10.3 billion |
$14.5 billion |
$18.4 billion |
|
YoY growth rate |
11% |
14% |
171% |
279% |
409% |
Data source: Nvidia.
Nvidia stock currently trades at a price-to-earnings ratio of 76 times, so it’s not cheap. But the drop in valuation over the past year may surprise investors, given rising data center revenue growth and continued demand for chips that power AI. Still, at some point demand may slow down, making it an even more attractive valuation to accumulate shares of this great company.
2. Arista Networks
Nvidia’s impressive revenue growth was driven by sales of chips used in data centers. These data centers also Arista Networks (ANET 6.07%)sells the switches and routers needed to run large data centers for the world’s largest technology companies.
Arista’s growth story is focused on revenue growth, not revenue growth. In fact, revenue growth has slowed in recent quarters, making the rest of the performance even more impressive. In the recently reported first quarter of 2024, Arista reported earnings per share of $1.99, an increase of 44% compared to the first quarter of 2023. Arista also generated free cash flow of $520 million, compared to $369 million in the prior year period.
Arista currently trades at 42 times earnings, making it cheaper than Nvidia but still quite expensive. Looking back over the past five years, Arista’s average price-to-earnings (P/E) multiple was 34x; S&P500 Arista is certainly a quality company that deserves to trade at a high price, but there may be better buying opportunities in the future.
3.Broadcom
broadcom (AVGO 2.08%) It may not be a household name, but it has a long and distinguished history in the world of technological advancement. The company’s products are used in data centers, broadband modems, computers, and mobile phones, and there’s a good chance most investors are using one of their products without knowing it.
Broadcom reports its results in two segments: infrastructure software and semiconductor solutions. To date, the Semiconductor Solutions segment has accounted for 78% of Broadcom’s revenue. However, its recent acquisition of cloud software company VMware has changed its revenue mix, with infrastructure software now accounting for 38% of revenue.
The VMware acquisition resulted in year-over-year revenue growth that far exceeded Broadcom’s typical example. Revenue growth in Q1 2024 was 34% compared to his single-digit revenue growth over the past few quarters. The company expects full-year revenue growth of $50 billion, a 40% increase from 2023.
Broadcom’s P/E ratio is 48 times, which is a significant increase from a year ago, when it was trading at just under 20 times. Broadcom’s acquisition of VMware is still in its early stages, so investors should keep an eye on how the integration of the two businesses develops over time. A market decline may present an opportunity to buy stocks at higher valuations than they currently are.
Jeff Santoro has held positions at Arista Networks, Broadcom, and Nvidia. The Motley Fool has a position in and recommends Arista Networks and his Nvidia. The Motley Fool recommends his Broadcom. The Motley Fool has a disclosure policy.
