The tech sector struggled in 2022 due to challenging macroeconomic conditions. However, the artificial intelligence (AI) boom in the previous year reinvigorated the sector, propelling many tech stocks to new heights. Most AI tech companies have been integrating AI into their products to stay competitive in the industry.
Notably, two top growth picks for 2024 are Alphabet (GOOGL) and Advanced Micro Devices (AMD). In 2023, Alphabet’s stock gained 58%, while AMD shares surged 127%, outperforming the Nasdaq Composite’s return of 44.5%. Following their recent strong quarterly results, Wall Street rates both stocks as a “strong buy,” with more upside expected over the next 12 months.
The Case for Alphabet Stock
Since 2017, Alphabet has integrated AI into its products, including Gmail, Photos, Maps, and more. The company now plans to offer more advanced AI-based products to its customers. GOOGL stock has surged 6.7% year-to-date, yet is down 3% from its all-time high.
Alphabet’s Google Search continues to dominate the search engine market, with a share of around 92%. Despite challenges from the Department of Justice and peer Microsoft (MSFT) questioning its monopoly last year, Google Search’s revenue increased by 8% year-over-year to $175 billion in 2023.
Another growth driver for Alphabet is Google Cloud, ranking third in the overall cloud computing market. Cloud revenue rose 26% year-over-year to $33 billion in 2023. YouTube ad revenue also increased 7.7% for the year to $31.5 billion.
CEO Sundar Pichai stated, “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”
Alphabet’s financial strength, with $110.9 billion in cash, cash equivalents, and marketable securities, and a long-term debt of $13.2 billion, provides a solid foundation to capitalize on AI. With a free cash flow of $69.5 billion at the end of the quarter, it is well-positioned for future growth.
Out of the 41 analysts covering Alphabet stock, 32 have a “strong buy” recommendation, three recommend “moderate buy,” and six recommend “hold.” Based on analysts’ average price target of $160.92, Wall Street sees potential upside of about 8% in the next 12 months, with a Street-high target of $180.
Analysts predict that Alphabet’s revenue and earnings will grow by 11.4% and 16.1%, respectively, in 2024. It is currently trading at 21 times forward earnings, while Amazon (AMZN) and Microsoft have forward price-to-earnings (PE) ratios of 40x and 35x, respectively, making Alphabet an attractive hyper-growth stock.
The Case for Advanced Micro Devices Stock
While Nvidia (NVDA) has long dominated the semiconductor space, AMD has made significant strides to establish a strong market position. Last year, the company’s fundamentals improved as demand for its graphic processors increased, and AMD’s recent fourth-quarter and full-year results reaffirmed the company’s stronghold in the semiconductor space.
AMD shares are up 17% year-to-date, outperforming the S&P 500 Index’s gain of 5.4%.
AMD’s data center segment is recovering strongly. In the fourth quarter, the segment’s revenue increased 38% year-over-year to $2.3 billion, driven by more rapid customer adoption of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs. AMD’s client segment sales increased by a whopping 62% to $1.5 billion, thanks to an increase in demand.
AMD Ryzen 7000 Series CPU Sees Sales Surge Despite Struggling Gaming Segment
Challenges in the Gaming Sector
In the shadow of a remarkable trajectory in sales of AMD’s Ryzen 7000 Series CPUs, a different narrative plays out in the gaming realm. Sales within this sector have experienced a notable slip of 17% year-over-year in the last quarter, signifying a considerable challenge for the company.
Confidence Amid Challenges
Despite a 24% decline in embedded segment sales in Q4, AMD’s management remains resolute and unwavering in asserting their confidence in the long-term growth trajectory for this segment. Their steadfast faith seems grounded in the company’s expansion of its AI software ecosystem, which includes the strategic acquisitions of AI software leader Mipsology and open-source AI software expert Nod.ai in the previous year.
Positive Financial Performance
Notwithstanding the sector-specific setbacks, AMD recorded a sizeable 10% year-over-year upturn in total revenue, amounting to $6.2 billion in the fourth quarter. Diluted earnings per share (EPS) surged to $0.41 in the same period, a substantial leap from $0.01 in the comparative quarter. Remarkably, the earnings in the latest quarter aligned closely with consensus estimates, while revenue surpassed expectations, indicating the company’s resilience.
Contributing Factors to Revenue and Earnings Growth
According to management, robust sales of AMD Instinct GPU, EPYC CPU, and higher AMD Ryzen processor contributed significantly to the quarter’s surge in total revenue and earnings. These factors underscore the company’s adept handling of a challenging landscape, showcasing a capacity to navigate turbulence and steer toward growth.
Strong Anticipation for Long-term Growth
As the AI era unfurls, the demand for high-performance graphic processors is anticipated to surge, a trend that bodes well for AMD’s long-term growth prospects. Industry analysts predict that in 2024, revenue and earnings will escalate by 13.8% and 37.7% year-over-year, respectively, reflecting a positive outlook for the company’s future amidst the current challenges.
Wall Street’s Perspective
Reflecting Wall Street’s optimism, a “strong buy” rating has been assigned to AMD. Out of the 33 analysts covering the stock, 27 advocate a “strong buy,” while one recommends a “moderate buy” and five suggest a “hold.” Such a bullish sentiment underscores the confidence in AMD’s ability to weather the storms and emerge stronger.
Potential Upside
Based on the average target price of $184.37, the stock presents a potential upside of 6.8% within the next 12 months. Moreover, the high target price of $270 implies a substantial potential upside of 56% from its current levels, indicating a robust investor sentiment and faith in the company’s ability to rebound. Such potential provides concrete evidence of the underlying strength and resilience of AMD’s business model, reflecting a capacity to rise above the transient setbacks.
