AI Stocks: Tech Giants, Cloud Titans Face 'Show Me' Moment. CES 2025 Hype On Tap.

Is the artificial intelligence stock market boom still wired or tired? Top AI stocks such as Microsoft (MSFT) and Nvidia (NVDA) face high expectations. For many companies — such as Google parent Alphabet (GOOGL), Amazon.com (AMZN) and Facebook parent Meta Platforms (META) — the rise of generative AI poses both risk and opportunity.

Amid the emergence of generative AI — which generates text, images, and video — it's a good time to be cautious amid the hype, especially given recent developments at Super Micro Computer (SMCI).

Also, the CES 2025 consumer and automotive tech trade show will be full of AI announcements from companies like SoundHound AI (SOUN). Nvidia CEO Jensen Huang will deliver the keynote address on Monday night.

Trump Good For AI Stocks?

President-elect Donald Trump takes office Jan. 20. He's expected to promote the build out of AI data center infrastructure. Also, Trump could repeal President Joe Biden's AI executive order, which required companies training large AI models to share information about them with the federal government. Also, tech giants may have more leeway to acquire AI startups under a Trump administration.

Meanwhile, startups OpenAI and Anthropic are battling Google, Meta and others in developing large, multimodal and small language foundation models. Google stock gained 37% in 2024 despite growing competition in internet search.

OpenAI recently laid out more details of its plans to adopt a for-profit business structure in 2025, amid negotiations with investor Microsoft and a feud with Tesla (TSLA) founder Elon Musk.

↑ X NOW PLAYING AI's Next Frontier: The Tech Set To Dominate CES 2025

AI Stocks: Nvidia Mojo Back?

Many companies suddenly tout AI product roadmaps. In general, look for AI stocks that use artificial intelligence to improve products or gain a strategic edge.

Meanwhile, chipmaker Nvidia has been a bellwether for AI stocks. Nvidia stock jumped 171% in 2024 after surging 239% in 2023. But Nvidia stock plateaued in the second half on 2024. Shares gained ahead of the CES 2025 tech show. For Nvidia, ramping up production of next-generation Blackwell AI chips in 2025 has been a key issue.

Rival Broadcom (AVGO) soared on its AI chip demand outlook. Broadcom makes custom AI chips for cloud computing titans.

Meanwhile, Arista Networks (ANET) makes cloud computing networking gear for Meta, Microsoft and others.

What's more, data analytics software maker Palantir (PLTR) has bucked the trend that chipmakers are the best AI stocks. PLTR stock soared 340% in 2024. Palantir stock ranks No. 3 in the IBD 50 roster of growth stocks.

Microsoft is the biggest investor in generative AI leader OpenAI, having spent some $14 billion on the startup.

Further, Nvidia-based CoreWeave is a new AI cloud infrastructure provider that plans an IPO in 2025.

Key Issues For Top AI Stocks

Meanwhile, Meta hired away Salesforce's (CRM) top AI executive, Clara Shih, to head a new "Business AI" group.

Also, capital spending has boomed at cloud computing giants Amazon, Microsoft and Google. Tech giants are spending heavily on data center infrastructure, such as AI chips and servers, as well as research and development.

Capacity constraints in Microsoft's data centers are limiting its ability to meet demand, resulting in a slower growth forecast for its Azure cloud-computing business.

Amid increased capital spending by cloud computing giants, the big question is how much incremental AI-related revenue they're getting. The cloud giants in the September quarter notched revenue growth for the fourth straight quarter, indicating that AI investments may be paying off.

Also, Apple (AAPL) has been one of the top AI stocks to watch. The big question is whether Apple Intelligence features in iPhone 16 models will spur a big upgrade cycle.

The best AI stocks to buy span chipmakers, software companies, cloud computing service providers and technology giants.

What's clear is that AI stocks are under more scrutiny.

"We expect AI to transition from a 'tell me' to a 'show me' story, with any disconnect between investments and revenue generation to come under increased scrutiny," said a Bank of America report. "

Software Makers Pivot to AI Agents

So far, the biggest demand for AI chips has come from cloud computing giants and internet companies.

Broadcom, Qualcomm, ARM Holdings (ARM), and Marvell Technologies (MRVL) are other AI chipmakers to watch. Broadcom and Marvell make custom AI chips for cloud computing giants.

In general, semiconductor plays have out-performed software companies as the best AI stocks.

Many software companies, meanwhile, have yet to monetize AI products. One big issue for software companies is how fast customers ramp up pilot programs to commercial deployment.

Having struggled to generate new revenue from "copilots," software companies are now turning to AI agents.

Also, for most big application software companies, how to charge for AI-related products has been an issue. Many U.S. companies are pursuing custom AI software development projects, which will take longer to ramp up commercially.

Also, AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions.

Until recently, machine learning was largely limited to models that processed data to make predictions. The AI models focused on pattern recognition from existing data. Corporate spending on AI projects was modest as companies mulled return on investment.

AI Stocks To Watch By Industry Group

New generative AI models process "prompts," such as internet search queries, that describe what a user wants to get. Generative AI technologies create text, images, video and computer programming code on their own.

Companies will aim to boost productivity by developing customized AI for specific industries. Proprietary company data will be used to train AI models.

AI systems require massive computing power to find patterns and make inferences from large quantities of data. So the race is on to build AI chips for data centers, self-driving cars, robotics, smartphones, drones and other devices.

For chipmakers, analysts expect a market for "edge AI" — on-device processing of AI apps to emerge.

While "training" AI models is now the biggest market for chipmakers like Nvidia, the market will shift to "inferencing," or running AI applications, in the long run.

Will AI Startups Challenge Tech Giants

What's more, one key question for investors is whether tech industry incumbents will be the big generative AI winners. Or, will a new wave of AI startups eventually dominate? OpenAI has told employees its now on an annual revenue run-rate of $3.4 billion, up from $2 billion in January.

OpenAI has raised $6.6 billion in new funding, valuing the startup at $157 billion, up from $86 billion early this year. The new round was led by venture-capital firm Thrive Capital. Microsoft again invested. New investors include SoftBank and Nvidia but not Apple as rumored.

Large language models provide the building blocks to develop applications. Further, LLMs help AI systems understand the way that humans write and speak. Also, LLMs require training data for specific tasks. Companies with access to troves of data hold an edge.

OpenAI is part of a wave of LLM startups that includes AI21 Labs, Anthropic and Cohere. Anthropic introduced Claude 3, the newest version of its chatbot, and claimed its performance is better than OpenAI's GPT-4.

However, OpenAI's dominance faces a challenge from open-source LLMs.  Musk's xAI announced it will open source its Grok LLM, and released the source code for public use.

Meanwhile, President-elect Donald Trump named former PayPal Holdings (PYPL) executive and Silicon Valley venture capitalist David Sacks as his artificial intelligence and cryptocurrency czar. Further, Sacks is an associate of Tesla (TSLA) and SpaceX founder Elon Musk, who has emerged as a key advisor to Trump.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.

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