Will Earnings from These 10 AI Stocks Live Up to the Hype?

This
article
highlights
10
AI-related
stocks
Morningstar
analysts
will
be
watching
closely
this
earnings
season,
along
with
key
AI-specific
areas
for
each
company.

In
recent
days,
AI-related
stocks
have
taken
a
sudden
turn
lower.
But
over
the
past
12
months,
the Morningstar
Global
Next
Generation
Artificial
Intelligence
Index,
which
aims
to
reflect
leading-edge
AI
technologies,
has
gained
60.56%.
So
far
this
year,
the
index
is
up
10.95%,
roughly
twice
the
overall
market’s
gain.

Key
AI
Stocks
to
Watch

•
Adobe (ADBE)
• Advanced
Micro
Devices (AMD)
• Amazon (AMZN)
• Arista
Networks (ANET)
• Arm
Holdings (ARM)
• Broadcom (AVGO)
• Intel (INTC)
• Marvell
Technology (MRVL)
• Microsoft (MSFT)
• Nvidia (NVDA)

AI
Stock
Performance

Far
and
away
the
biggest
winner
in
the
AI
stock
space
has
been
Nvidia,
up
more
than
200%
over
the
last
12
months
and
70%
so
far
this
year.
Broadcom
boasts
a
102%
rally
over
the
past
year
and
13%
so
far
this
year.

Are
There
Undervalued
Opportunities
In
AI?

Of
the
10
companies
highlighted
here,
six
are
fairly
valued
and
three
are
overvalued,
based
on
Morningstar’s
fair
value
estimates.
Only
Adobe
is
undervalued.

Morningstar
director
of
equity
research Eric
Compton
says:
“Everyone
is
already
focused
on
finding
AI
beneficiaries,
and
valuations
reflect
that.

“It
is
hard
to
find
obvious
undervalued
names
with
exposure
to
this
space.
If
anything,
many
names
seem
overvalued,
and
we
believe
growth
would
have
to
far
exceed
our
current
expectations
to
justify
the
valuations
for
many
of
the
obvious
AI-related
names
under
our
coverage.”

However,
investors
haven’t
needed
to
find
undervalued
names
to
reap
serious
rewards
from
AI
stocks.
In
April
2023,
three
stocks
on
the
list
were
undervalued,
four
were
fairly
valued,
and
two
were
overvalued.
(Arm,
which
had
its
IPO
in
September
2023,
did
not
have
a
rating.)
Over
the
past
year,
eight
of
the
nine
stocks
(excluding
Arm)
outperformed
the Morningstar
US
Market
Index,
which
has
gained
22.32%.
The
two
names
that
were
overvalued
a
year
ago,
Arista
Networks
and
Nvidia,
outperformed
the
market
by
more
than
double,
with
Nvidia
returning
more
than
nine
times
the
market.

High
Uncertainty
Among
AI
Stocks

How
well
AI
stocks
can
meet
the
hopes
assigned
to
them
will
be
a
critical
aspect
of
first-quarter
earnings.
For
investors,
challenges
include
high
uncertainty
around
business
lines
and
the
opaqueness
of
revenue
streams.

The
degree
to
which
companies
can
provide
a
clear
window
into
AI
prospects
somewhat
ties
back
to
their
products.
Companies
benefiting
from
AI
typically
fall
into
two
buckets:
hardware
and
software.
Hardware
companies,
such
as
Nvidia
and
Intel,
produce
the
chips
that
power
AI
systems.
Software
companies,
like
Adobe
and
Microsoft,
develop
and
train
the
systems
themselves.

“AI-specific
revenues
are
easiest
to
track
in
the
hardware
names,”
says
Compton.
“They
have
specific
products
tied
to
AI
model
training
demand,
and
hardware
names
are
currently
benefiting
the
most
in
revenue
growth.”

In
the
software
space,
Morningstar
analysts
say
it
is
much
more
difficult
to
pick
out
what
revenue
is
and
isn’t
AI-related,
as
many
of
these
companies
do
not
have
exact
disclosures.
One
reason
is
that
they
“remain
in
the
experimentation
phase
as
they
try
to
figure
out
the
exact
use
cases
and
revenue
models
for
AI
offerings,
so
there
is
not
much
to
disclose”,
Compton
explains.
Another
reason
is
that
“current
AI
offerings
are
simply
additional
functionality
built
into
existing
offerings,
so
trying
to
parse
what
is
‘new’
AI-related
revenue
and
what
isn’t
is
nearly
impossible”.

This
high
degree
of
uncertainty
is
reflected
in
analysts’
Morningstar
Ratings.
Eight
of
the
10
stocks
on
this
list
have
Uncertainty
Ratings
of
High
or
Very
High.
The
other
two,
Broadcom
and
Microsoft,
have
Uncertainty
Ratings
of
Medium.

Here’s
what
Morningstar
analysts
say
about
these
stocks
ahead
of
their
first-quarter
earnings
reports.

Morningstar’s
Take
on
AI
Stocks

Adobe (ADBE)

• Earnings
Release
Date:
June
13
• Fair
Value
Estimate:
$610.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
4
stars

“Shares
began
to
slide
in
February
2024
when
OpenAI
announced
its
new
Sora
text-to-video
model.
It
surely
is
impressive.
However,
Adobe
announced
a
similar
Firefly
model
in
October
2023.
Neither
model
is
generally
available
yet,
but
Adobe’s
should
be
within
a
few
months.
Firefly
video
is
similarly
impressive.
Given
the
company’s
already-strong
position
within
the
creative
community,
we
see
Adobe
as
maintaining
its
lead
here.

“Shares
of
Adobe
represent
an
attractive
entry
point
in
our
view
given
the
intersection
of
a
wide
moat
and
a
meaningful
discount
to
our
fair
value
estimate.
We
think
shares
have
retracted
simply
due
to
management’s
poor
handling
of
the
basic
question
around
the
trajectory
of
net
new
digital
media
annual
recurring
revenue
for
the
rest
of
the
year,
rather
than
a
true
near-term
demand
issue.”

Dan
Romanoff,
senior
equity
analyst

Advanced
Micro
Devices (AMD)

• Earnings
Release
Date:
April
30
• Fair
Value
Estimate:
$145.00
• Morningstar Economic
Moat
Rating:
Narrow
• Morningstar
Rating:
3
stars

“The
single
biggest
driver
of
upside
for
Advanced
Micro
Devices,
in
our
view,
will
be
its
progress
in
selling
AI
GPUs
such
as
its
MI300X
product.
Management’s
initial
guidance,
which
we
thought
was
conservative
at
the
time,
was
for
$2
billion
in
revenue
in
2024,
which
the
company
has
since
raised
to
$3.5
billion
(and
we
model
$4
billion).
Further
upside
is
possible.

“On
the
other
hand,
AMD’s
embedded
business
faces
weakness
due
to
soft
telecom
spending,
gaming
console
chip
revenue
will
pause,
and
it’s
conceivable
that
some
of
this
GPU
spending
could
be
offset
by
lower
server
CPU
spending
across
the
industry.
This
latter
point
could
take
the
shine
off
any
potential
upside
in
GPU
revenue.”

Brian
Colello,
equity
strategist

Amazon.com (AMZN)

• Earnings
Release
Date:
April
30
• Fair
Value
Estimate:
$185.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
3
stars

“Amazon
Web
Services
continues
to
stabilise
as
optimisation
efforts
at
customers
wane
and
new
workload
migrations
and
other
cloud
initiatives
like
generative
AI
are
driving
new
demand.
Cloud
optimisation
efforts
are
over
and
large
deals
are
coming
back.
Management
believes
generative
AI
can
add
tens
of
billions
of
dollars
to
revenue
over
the
next
several
years,
which
seems
possible
given
the
vagueness
of
the
comment.

“Profitability
has
been
surprising
to
the
upside
in
recent
quarters
and
we
expect
something
similar
this
quarter.
Last
quarter
we
raised
our
longer-term
margin
outlook.
The
regional
hub
model
has
delivered
more
savings
than
anticipated
thus
far,
which
we
don’t
think
ends
overnight.

“Advertising
has
been
strong,
and
as
the
retail
business
continues
to
recover,
we
expect
advertising
to
remain
strong
in
the
near
term,
likely
outperforming
other
large
internet-based
advertising
peers.”

Dan
Romanoff

Arista
Networks (ANET)

• Earnings
Release
Date:
May
7
• Fair
Value
Estimate:
$195.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
2
stars

“Arista
Networks
has
a
significant
opportunity
in
data
centre
switching
to
support
AI
model
training.
It
is
the
leader
in
high-speed
data
centre
switching,
which
is
needed
for
AI.
It
has
a
wide
moat
from
its
proficiency
here.
It
has
targeted
$750
million
in
AI
revenue
in
2025.

“We
believe
Arista
Network’s
AI
opportunity
is
immense,
and
we
have
raised
its
valuation
to
reflect
that.
However,
we
believe
shares
are
pricing
in
overly
rosy
expectations
(and
hype)
about
AI
spending,
and
shares
look
out
of
reach
to
us.”

William­
Kerwin,
equity
analyst

Arm
Holdings (ARM)

• Earnings
Release
Date:
May
8
• Fair
Value
Estimate:
$57.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
1
star

“Firms
like
Synopsys (SNPS),
Cadence (CDNS),
or
Arm
have
a
bright
future
as
tool
supporters
of
the
AI
ecosystem,
but
we
don’t
expect
they
will
benefit
from
AI
to
the
same
extent
that
Nvidia
does.
While
Nvidia’s
costs
to
design
a
superchip
like
the
Grace
Hopper
are
higher
than
previous
generations
of
GPUs,
these
have
scaled
much
slower
than
prices,
resulting
in
very
high
operating
leverage.
Put
simply,
Nvidia
does
not
need
to
spend
50
times
more
in
Synopsys
software
or
pay
50
times
more
to
Arm
in
royalties
to
design
a
superchip
that
sells
for
50
times
more.
While
Arm
and
other
peers
will
gradually
benefit
from
AI
in
the
following
years
as
ecosystem
supporters,
we
expect
their
profits
will
grow
more
in
line
with
revenue
because
they
don’t
have
the
same
pricing
power
and
operating
leverage
as
Nvidia.”

Javier
Correonero,
equity
analyst

Broadcom (AVGO)

• Earnings
Release
Date:
June
12
• Fair
Value
Estimate:
$1,090.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
2
stars

“Broadcom
is
the
second-largest
AI
chipmaker
by
revenue
to
Nvidia.
Broadcom
has
a
large
exposure
to
custom
AI
accelerators.
It
designs
the
Google (GOOGL)
TPU,
a
custom
chip
for
Meta
Platforms (META),
and
just
announced
an
unidentified
third
large
cloud
customer.
It
also
provides
high-speed
switch
chips
for
AI
training
and
inference.

“Broadcom
notched
nearly
$4
billion
in
AI
chip
revenue
in
fiscal
2023
(October
end)
and
is
targeting
$10
billion
in
fiscal
2024,
which
it
recently
raised
from
an
initial
target
of
$8
billion.

“We
forecast
immense
growth
for
Broadcom’s
AI
chip
sales,
which
we
think
will
quickly
approach
a
majority
of
its
overall
semiconductor
sales.
However,
we
believe
to
justify
its
current
valuation,
one
would
have
to
assume
consistent
50%
growth
over
the
next
five
years
for
AI
revenue
–
we’re
closer
to
a
30%
compound
annual
growth
rate,
tapering
down
toward
the
lower
double
digits
by
2028.

“Broadcom’s
non-AI
chip
markets
are
taking
some
hits
in
2024,
but
its
immense
AI
growth
is
offsetting
weakness
elsewhere.”

William
Kerwin

Intel (INTC)

• Earnings
Release
Date:
April
25
• Fair
Value
Estimate:
$40.00
• Morningstar Economic
Moat
Rating:
None
• Morningstar
Rating:
3
stars

“Similar
to
AMD,
we’ll
be
interested
in
Intel’s
AI
accelerator
pipeline
with
its
Gaudi
products.
The
company
introduced
its
latest
version,
Gaudi
3,
in
early
April.

“Intel
recently
disclosed
details
into
its
revenue
and
operating
income
by
segment,
and
Intel
Foundry
has
incurred
greater
losses
than
what
the
market
was
expecting.
We
don’t
anticipate
a
turnaround
in
Q1
results,
but
this
will
likely
be
an
area
of
investor
interest
since
a
manufacturing
turnaround
will
drive
upside
to
the
stock.

“We
anticipate
that
Intel
will
continue
to
tout
its
PC
AI
CPUs
for
edge
AI
workloads.
We’re
not
clear
as
to
the
potential
timing,
economics,
or
upside
from
this
opportunity.
AI
may
drive
a
PC
refresh
cycle
but
with
no
chip
ASP
uplift,
or
perhaps
no
PC
unit
upside
at
all
but
with
higher
chip
ASPs.
We
remain
interested
in
this
topic.”

Brian
Colello

Marvell
Technology (MRVL)

• Earnings
Release
Date:
TBA
• Fair
Value
Estimate:
$65.00
• Morningstar Economic
Moat
Rating:
Narrow
• Morningstar
Rating:
3
stars

“Similarly
to
Broadcom,
networking
chip
sales
in
any
non-AI
market
are
having
a
weak
2024
(with
a
January
fiscal
year-end,
Marvell
Technology’s
fiscal
year
2025
is
roughly
calendar
year
2024).
Marvell’s
AI
sales
growth
is
helping
to
offset
the
weakness
in
its
other
end
markets.

“Marvell
has
an
extremely
strong
position
in
optical
transceiver
chips
that
sell
into
data
centres
and
AI
networks.
We
expect
strong
growth
for
these
sales
as
AI
models
and
spending
continue
to
grow.
Marvell
also
has
design
wins
for
custom
AI
accelerators,
including
Amazon
as
one
of
its
customers.
We
expect
strong
sales
growth
to
accrete
from
these
over
the
next
two
years.

“Marvell
is
modestly
overvalued.
It
hasn’t
traded
up
to
the
same
extent
of
other
AI
networking
plays
Arista
Networks
and
Broadcom,
but
we
continue
to
think
shares
imply
overly
rosy
expectations
for
growth,
even
against
our
forecast
that
we
see
as
bullish.”

William
Kerwin

Microsoft (MSFT)

• Earnings
Release
Date:
April
25
• Fair
Value
Estimate:
$420.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
3
stars

“Azure
growth
was
28%
in
constant
currency
in
the
most
recent
quarter,
with
600
basis
points
coming
from
AI-related
services.
Guidance
calls
for
the
same
level
of
growth
this
quarter,
which
was
strong.
Any
modest
upside
here
will
likely
be
well-received.
We
doubt
management
will
break
out
the
AI-related
growth
again
this
quarter.

“Microsoft
said
the
vast,
vast
majority
of
AI
demand
on
Azure
is
for
inference
rather
than
model
training.
We
think
this
was
surprising
to
many,
given
the
explosion
of
interest
in
generative
AI.
However,
given
that
Microsoft
has
been
offering
AI
and
machine-learning
services
on
Azure
for
years,
it
likely
already
generates
billions
of
dollars
in
AI
services,
which
would
obviously
be
tilted
toward
inference.
You
train
a
model
once
and
then
infer
with
it
until
you
release
a
new
model
a
year
later.

“Microsoft
is
releasing
its
Maia
and
Cobalt
chips
later
this
year.
We
think
this
is
an
important
step
in
expanding
the
Azure
AI
Services
menu
but
not
likely
to
change
the
balance
of
power
in
cloud
providers
or
likely
to
have
a
material
impact
on
the
chip
providers.”

Dan
Romanoff

Nvidia (NVDA)

• Earnings
Release
Date:
May
22
• Fair
Value
Estimate:
$910.00
• Morningstar Economic
Moat
Rating:
Wide
• Morningstar
Rating:
3
stars

“Nvidia
continues
to
sit
at
the
epicentre
of
AI
development.
Demand
for
Nvidia’s
GPUs
continues
to
exceed
supply
and
we
anticipate
that
Nvidia’s
revenue
growth
is
locked
in
for
the
next
few
quarters
as
the
ecosystem
continues
to
increase
supply.
Any
commentary
to
the
contrary
would
be
a
surprise
to
us.

“Nvidia
estimates
that
40%
of
its
GPUs
are
used
in
AI
inference,
which
was
a
positive
development
in
our
view
as
inference
might
be
a
larger
market
than
AI
training.
Any
positive
data
points
on
this
front
might
be
well
received
again.

“Gross
margins
should
remain
stellar,
but
management
hinted
at
a
downtick
later
this
year
when
its
new
Blackwell
GPUs
reach
the
market.
We’ll
be
interested
in
the
mix
shift
at
Nvidia
between
its
newest
vs.
prior-generation
GPUs.”

Brian
Colello