The upward trajectory of the S&P 500, fuelled by AI, can be leveraged with key growth stocks. After a disappointing last year, the S&P 500 has bounced back with a 15.9% upswing in the first half of 2023. Wall Street insiders anticipate that the flourishing AI market will continue this positive trend.
Goldman Sachs’ Ryan Hammond asserts that the S&P 500 is undervalued as the market has not yet fully recognized the potential economic advantages of AI. Similarly, Thomas Mathews from Capital Economics predicts the S&P 500 could reach 6,500 by 2025 due to AI excitement, indicating a 47% potential increase from its current standing.
Here are two growth stocks that may allow investors to profit from this AI surge.
1. Alphabet
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) saw mediocre financial results in the first quarter, with a mere 3% increase in revenue to $69.8 billion and a 5% decrease in earnings to $1.17 per diluted share. Even though these figures surpassed Wall Street’s predictions, economic issues significantly slowed revenue growth from the previous year’s 23%.
However, Alphabet’s potential remains strong. Its subsidiary, Google, holds a formidable position in the digital advertising and cloud computing markets. Both these sectors are projected to grow by 14% annually until 2030. Moreover, Google is a leading AI player, and Ark Invest forecasts AI software revenue to surge by 42% yearly through 2030.
Google’s monopoly on internet search and YouTube’s popularity provides Alphabet with a unique data collection platform, making it a desirable partner for advertisers. Google accounted for an industry-leading 30% of global digital ad spending last year, and is projected to command 29% in 2024, as per eMarketer.
In addition, Google is making headway in the cloud computing realm. The company boosted its market share in cloud infrastructure and platform services (CIPS) from 8% to 10% year-on-year, owing to a revamped marketing strategy and continuous product innovation. Gartner consultancy reports that Google’s CIPS capabilities are improving faster than any other provider.
While Google may not have a trending AI application like ChatGPT, it has received accolades for its work in AI infrastructure, conversational AI platforms, and AI-powered document analytics. Google’s foray into generative AI with Duet, which aids work processes by generating text, creating images, and analyzing data, also holds promise.
In summary, Alphabet’s potential to maintain double-digit revenue growth until 2030 and a reasonable current sales multiple of 5.5 makes it a worthy investment.
2. Zoom Video Communications
Known for its video conferencing software, Zoom Video Communications (NASDAQ: ZM) also offers enterprise solutions like Zoom Phone, Zoom Rooms, and Zoom Contact Center. It has ventured into AI software with its IQ for Sales and Virtual Agent offerings, improving business efficiency and positioning Zoom to capitalize on the growing demand for AI software.
Zoom’s Q1 financial results were disappointing, with a mere 3% revenue rise to $1.1 billion and a 20% cash flow reduction to $419 million. However, the decline in online customer churn to a multi-year low of 3.1% and a 16% year-on-year increase in remaining performance obligation (RPO) – a leading revenue indicator – suggest future growth.
Zoom projects its total addressable market to be $125 billion by 2026, encompassing various product categories, including AI software, estimated at $19 billion. Only Zoom Meetings and Zoom Phone constitute over 10% of the total revenue, highlighting untapped potential.
Given its current sales multiple of 4.4, significantly lower than its three-year average of 27.1, Zoom is a promising investment.
Alphabet and Zoom present considerable potential for growth, particularly in the thriving AI market. Their promising positions in the rapidly evolving digital landscape and appealing valuations make these two stocks worthy of consideration for any investor looking to capitalize on the AI boom. As always, it’s crucial to thoroughly research and evaluate each investment in light of individual financial circumstances and risk tolerance.
