Two AI Stocks Projected to Rise Over 41% Based on Analyst Forecasts
The Impact of Artificial Intelligence on Business and Chip Stocks
The rise of artificial intelligence (AI) has created significant opportunities for businesses, fueling stock market growth in recent years. According to IDC, investments in AI, which includes infrastructure and business services, are projected to hit around $632 billion by 2028. This trend poses new possibilities for enhancing operational efficiency and productivity within various industries, although it requires substantial funding for advanced chip technology.
Investing in Chip Companies
As companies invest in AI technologies, several leading chip manufacturers present attractive investment opportunities, with potential price increases ranging from 39% to 48%, as predicted by analysts. Here are two prominent players to consider:
Advanced Micro Devices (AMD)
Advanced Micro Devices (AMD) has long been a competitor in the graphics processing unit (GPU) market, second only to Nvidia. However, AMD specializes in general-purpose GPUs, tapping into a lucrative market. The current analyst price target for AMD is $148.34, suggesting a potential upside of 51% from its recent share price of $98.
- Financial Growth: AMD’s revenue saw a 14% increase year-over-year in 2024, with adjusted earnings per share rising by 25%. The demand for its Ryzen central processing units (CPUs) and GPUs designed for data centers has significantly contributed to this growth.
- Market Challenges: Despite these successes, some analysts expressed disappointment over the lack of specific revenue guidance for AMD’s data center GPUs during its fourth-quarter earnings announcement. Revenue from gaming and related segments is currently facing challenges, raising questions about short-term sales performance.
- Management’s Outlook: AMD’s management remains optimistic, citing strong interest in its upcoming Instinct MI350 GPUs. The stock is noted for its attractive forward price-to-earnings (P/E) ratio of 21, which is reasonable for a growing chip company, suggesting that the shares could recover towards the analyst price target within the next year.
Arm Holdings
Arm Holdings plays a critical role in the chip design industry, providing chips utilized across smartphones and cloud computing platforms. The stock has recently experienced a decline of 40% from its peak, but analysts maintain a positive outlook with an average price target of $158.43, indicating a potential 41% upside from its current share price of $112.
- Product Demand: Arm processors are in high demand thanks to their cost-effectiveness and energy efficiency, especially as investments in AI infrastructure grow and the power needs of data centers increase.
- Revenue Performance: In the recent quarter, Arm’s revenue increased by 19%, reaching $983 million. The company generates income mainly through royalties and licensing fees, which allows it to produce substantial free cash flow.
- Growth Potential: As AI technology advances, demand for Arm’s products is expected to grow, especially in areas such as the Internet of Things (IoT), smart home devices, and autonomous vehicles.
- Valuation Concerns: However, Arm’s stock faces challenges due to its high valuation, trading at 191 times free cash flow and 148 times earnings. Even with forecasts for 2026, it appears fully valued at 55 times future earnings. This could lead to volatility in the stock price until growth aligns with its high earnings multiples.
Summary of Opportunities
Both AMD and Arm Holdings are positioned to benefit from the rapid growth of AI and related technologies. While each company faces unique challenges, the ongoing demand for advanced chips and their strong market presence may offer promising potential for investors interested in the tech sector. Nonetheless, it’s essential to consider market conditions and company valuations when making investment decisions in this fast-evolving landscape.
