Artificial intelligence may have saved tech stocks in 2023. The prospects of AI leading to higher revenue and earnings gains contributed to the Nasdaq 100 gaining 35% year to date (YTD).
Although some AI stocks have felt small corrections in recent weeks, their YTD gains and long-term prospects remain strong. Companies that create AI tools and chips stand to benefit immensely from the trend. Also, corporations are using AI to increase efficiency and serve more customers.
The trend has produced many winners. But it’s important for investors to distinguish long-term investment opportunities from flash-in-the-pan stocks with shaky financials. Looking through companies’ financials and valuations can help investors discover compelling opportunities. Investors looking to gain more exposure to AI stocks may want to consider these top picks heading toward the end of the year.
Nvidia (NASDAQ:NVDA) started the year with scorching earnings that challenged market participants to reimagine AI’s potential. Nvidia’s growth played a large role in the Nasdaq 100’s rise and richly rewarded long-term investors.
In fact, Nvidia stock has more than tripled YTD, with shares up by a staggering 538% over the past five years. And, that rally helped the company become a part of the trillion dollar club. Even still, the stock has more room to run.
While the stock carries a 100 P/E ratio, a dramatic acceleration in revenue and net income growth has resulted in a more reasonable forward P/E ratio. Additionally, Nvidia more than doubled its revenue year over year (YOY) and net income went up by an astounding 843% YOY.
The company’s financial successes have brought the forward P/E ratio down to 40. Revenue and earnings growth will eventually decelerate, but the valuation can look promising by the time growth slows down in a meaningful way.
Broadcom (NASDAQ:AVGO) has established itself as one of the top semiconductor corporations in the industry. Currently, the VMware (NYSE:VMW) acquisition is reaching its final stages and will give Broadcom exposure to the cybersecurity industry.
Broadcom has been a reliable investment even before AI increased the company’s prospects. Shares have gained 50% YTD and are up by 240% over the past five years. The stock only has a 25 P/E ratio which gives it room to expand.
Investors shouldn’t expect AVGO stock to reach the same P/E multiple as Nvidia, but a continued trend of YOY revenue and net income growth can strengthen the valuation. A recent correction in Broadcom stock has resulted in an 18 forward P/E ratio.
Boasting healthy profit margins and a 2.20% dividend yield, the semiconductor corporation has been one of the best dividend growth stocks due to its rapid dividend growth over the years.
Supermicro (NASDAQ:SMCI) has outpaced most stocks, including Nvidia. SMCI shares have climbed 221% YTD, surging by more than 2,000% over the past five years. This small company only has a $14 billion market cap and a 23 P/E ratio.
The P/E ratio is important to keep in mind because most stocks with SMCI’s type of run tend to have astronomical valuations. Supermicro’s server and storage solutions are optimal for artificial intelligence tools.
The company is still seeing strong revenue and earnings growth. In fiscal Q4, revenue and net income grew by 33.6% YOY and 37.5% YOY, respectively. Supermicro achieved record breaking revenue in fiscal year 2023 by achieving 37% YOY revenue growth throughout the year.
Supermicro’s president and CEO Charles Liang gave investors plenty to be excited about during the press release, stating the company “continues to see unprecedented demand for AI”. That bodes well for investors who hope Supermicro has more gains in its future.
On this date of publication, Marc Guberti held long positions in NVDA, AVGO, and SMCI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.