In this piece, we will take a look at the Citigroup’s top 10 AI Stocks to Buy. For more stocks on this list, head on over to Citigroup’s Top 5 AI Stocks to Buy.
The future of AI is hard to predict, but some figures can give us an idea of its potential impact and growth. However, the global AI market value is expected to reach $267 billion by 2027, and $1,811.8 billion by 2030. AI is expected to contribute $15.7 trillion to the global economy by 2030, with the US, China, and Japan being the biggest beneficiaries. The global AI adoption rate grew steadily and now is 35%, a four-point increase from 2021.
Generative Artificial Intelligence has taken the investment world by storm as a transformative technology expected to impact a wide range of industries, from powering smartphones to enabling autonomous driving features in cars. It’s also given rise to tools retailers in the consumer staples segment use to surprise and delight customers. As it embeds in every layer of the technology stack, it’s given rise to a market growing at a compound annual growth rate of 37%, according to research by IDC.
The robust growth comes from the new-age technology revolutionizing various industries sparking innovation and shaping the future of business. The use of AI-powered machine learning algorithms to generate new and original content based on existing data continues to gain traction. In addition, technology is offering businesses an opportunity to innovate and gain a competitive advantage.
The potential for generative AI became clear when Microsoft integrated ChatGPT into its search engine Bing in a bid to enhance how people search and browse the internet. The move rattled Alphabet Inc. (NASDAQ:GOOGL), which responded by launching its own AI-powered chat tool Bard as it sought to safeguard its edge in the $200 billion internet search business.
Thus, it is not surprising that we have become a new frontier for venture capital investment, pouring billions of dollars into startups working on the next breakthrough in AI innovations. Investments in the generative AI space have grown by over 400% since 2020 reaching record highs of $2.1 billion in 2022. While growing at a compound annual growth rate of 37%, the AI market could be worth over $16 billion by 2026
While the focus has been on tech giants with exposure to revolutionary technology, analysts at Citigroup believe there is tremendous value to unlock in less obvious names like Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co (NYSE:JPM), and Globant SA (NYSE:GLOB).
For the longest time, the focus on Wall Street has been on big names like Microsoft Corp (NASADAQ: MSFT) and Alphabet Inc (GOOGL), which already leverage AI in their search tools. NVIDIA Corp (NASDAQ:NVDA) has also more than tripled in value, having emerged as a Wall Street darling in developing chips for powering AI innovation and tools.
Away from the big names in the tech sector, there are plenty of names in the consumer staples fintech, and health re that offer tremendous AI opportunities. Instead of focusing on AI enablers that provide platforms and tools for leveraging the technology, Citigroup believes the focus should be on adopters of the technology.
Bank of America and JP Morgan are some of the early adopters the Citigroup analysts believe are well poised to generate significant value from generative AI. The likes of Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) are also using the technology to monitor and combat fraud and identity theft in their platforms. Some of the fintech plays are already generating some sales linked to generative AI innovations.
According to Citigroup analyst Amit Harchandani, in an interview with CNBC, interest rates are not expected to affect the rate of generative AI adoption in the banking sector.
“Banks are looking at this as much more than a one, a two or even a three to five year trend. It’s much bigger, broader, and strategic in nature. If you look at the power of generative AI and the number of use cases across various segments of the banking industry, it is quite significant,” Harchandani said.
Photo by Andrea De Santis on Unsplash
Going forward, generative artificial intelligence is expected to significantly impact the retail and institutional banking sectors. The technology is expected to enhance data analysis and how banks interact with customers and invest.
The IT services sector has been perceived as one of the big looser amid the AI boom. There has always been a charter that AI will replace most of the jobs in the industry, therefore, rendering most of the companies in the sector worthless.
According to the Citigroup team, there are still worthwhile plays in the sector. Globant SA (NYSE:GLOB) is one of the IT services plays that have made big investments in AI and are well poised to be a winner and generate significant value amid the AI boom.
Our Methodology
We listed all AI companies in industrial, healthcare, software, and other domains favored by Citigroup to make our top AI Stocks to Buy list. Then, we used Insider Monkey’s database of 943 hedge funds to find out how many hedge funds invested in them in the first quarter of this year.
Citigroup’s Top AI Stocks to Buy
10. Shopify Inc. (NYSE:SHOP)
Number of Investors in Q1 2023: 66
Shopify Inc. (NYSE:SHOP) is an e-commerce platform. It has a large customer base, diversified revenue, innovative platform, and strong brand. It uses AI to enhance personalization, recommendation, marketing, fulfillment, and fraud prevention.
In the first quarter of 2023, 66 hedge funds held a stake in Shopify Inc. (NYSE:SHOP). ARK Investment Management was the leading shareholder in the company with a stake worth $670.48 million.
Shopify has a ‘Moderate Buy’ rating from 10 buys, 15 holds and 2 sells. The average price target is $63.73, ranging from $50 to $80. This is 0.92% higher than the current price of $63.15. Like Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co (NYSE:JPM), and Globant SA (NYSE:GLOB), Shopify Inc. (NYSE:SHOP) is one of the AI stocks on the radar of institutional investors.
RiverPark Advisors commented on Shopify Inc. (NYSE:SHOP) in its Q1 2023 letter. Here is what the fund said:
“Shopify Inc. (NYSE:SHOP): Shopify shares were a top contributor in the quarter as the market focused on the company’s recent price increases and its ongoing market share gains in e-commerce gross merchandise volumes (GMV). Earlier in the quarter the company reported better-than-expected 4Q results, with 26% revenue growth and $248 million of FCF (at a 14% margin), significantly better than the Street consensus of -$109 million.
Last year, 10% of US retail e-commerce sales flowed through SHOP, second only to Amazon, and the company is still enjoying significant tailwinds as retail merchants of all sizes adopt SHOP’s software tools to display, manage and sell their products across a dozen different sales channels. We believe that the overall growth of e-commerce, combined with the development of new products and services, such as its digital wallet Shop Pay and its pick, pack and ship Shopify Fulfillment Network, should continue to drive revenue growth of about 20% per year over the next several years, accompanied by re-acceleration of operating margin growth and FCF generation.”
9. Twilio Inc. (NYSE:TWLO)
Number of Investors in Q1 2023: 56
Twilio Inc. (NYSE:TWLO) is a cloud communications platform. It has a large market, flexible platform, loyal customer base, and high-growth revenue. It uses AI to improve speech recognition, natural language processing, sentiment analysis, and conversational AI.
In the first quarter of 2023, 56 hedge funds had a stake in Twilio Inc. (NYSE:TWLO) compared to 48 in the previous quarter. In Q1, the company’s biggest hedge fund holder, Generation Investment Management owned 7.56 million shares of the company worth $503.51 million.
Twilio Inc. (NYSE:TWLO) Inc has a ‘Moderate Buy’ rating from 10 buys, 12 holds and 1 sell. The average price target is $64.89. The highest target is $110, the lowest is $50. The average target is -0.67% lower than the current price of $65.33.
Here is what Aristotle Atlantic Partners, LLC, said about Twilio Inc. (NYSE:TWLO) in its Q4 2022 investor letter:
“We sold Twilio Inc. (NYSE:TWLO) and thereby reduced our subsector weight in software. The company reported a decent third quarter, but disappointed on fourth quarter 2022, full year 2023, and long-term guidance. The company is seeing macroeconomic headwinds and a slowdown spreading from technology, social media and cryptocurrency to retail and e-commerce. The other negative disclosure and a driver of this gross margin “miss” was that Twilio’s software sales are not accelerating at the rate that we expected. We are disappointed with this lower topline and low operating margin improvement guidance. The business transformation is taking longer than expected, and there is the heightened possibility that the new software growth could be stifled by more formidable competition as Twilio has made too many missteps.”
8. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Investors in Q1 2023: 91
Advanced Micro Devices, Inc. (NASDAQ:AMD) is one of the stocks that has rallied by more than 50% year to date on benefiting from the advances in artificial intelligence and cloud computing. Best known for its consumer line of components such as GPUs and central processing units, the company has emerged as the go-to partner for tech giants seeking custom chips for AI.
While it has played catch up to Nvidia in AI, its prospects have improved significantly on gaining financial and engineering resources from Microsoft to enhance AI chip expansion. Likewise, the company has unveiled its most powerful GPU to date, M1300X, that will compete with Nvidia AI products.
Consequently, AMD is one of the companies well-positioned to garner significant market share in the growing demand for chips to power generative AI solutions.
Our hedge fund data shows 91 funds long Advanced Micro Devices, Inc. (NASDAQ:AMD) in the first quarter. Their total stake value in the company was $4.86 billion. Advanced Micro Devices has a ‘Strong Buy’ rating. The average price target is $136.63, ranging from $80 to $200. This is 22.74% higher than the current price of $111.32.
Baron Funds made the following comment about Advanced Micro Devices, Inc. (NASDAQ:AMD) in its Q4 2022 investor letter:
“During the quarter, we added to our position in Advanced Micro Devices, Inc. (NASDAQ:AMD), a global fabless semiconductor company focusing on high performance computing technology, software, and products. AMD designs leading high-performance central and graphics processing units (known as CPUs and GPUs) and integrates them with hardware and software to build differentiated solutions for customers. While the company is seeing weakness in its PC business in the short term, we continue to believe AMD will be one of the lead beneficiaries of growing data center infrastructure spending driven by expanded use cases for AI and cloud computing across its product portfolio. AMD’s largest share gain opportunity is in its data-center-server CPUs, which continue to take share from incumbent Intel given a superior total cost of ownership proposition driven by better performance per watt of energy consumption across many computing workloads. We also believe Xilinx, a recent acquisition, offers AMD diversification opportunities through which it can benefit from the broader proliferation of semiconductors into all aspects of the industrial and consumer economies.”
7. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Investors in Q1 2023: 102
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of the companies well-positioned to ride the generative AI wave and generate significant value. It is a key AI enabler owing to its leading-edge nodes and advanced packaging technology for developing chips. The rise of chatbots and generative AI has presented strong demand for high-bandwidth memory.
Consequently, TSMCs Chip on Wafer on Substrate has emerged as a preferred choice for AI server chips; The technology allows the integration of various chips, such as processors memory and graphics, into a single package.
The result has been the development of powerful AI-capable chips with improved performance and reduced power consumption, consequently, the strong demand in the market.
Among the hedge funds tracked by Insider Monkey, 102 hedge funds had a stake in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in the first quarter of 2023. Their combined stake value was $8.99 billion. In the previous quarter, 86 hedge funds had a stake worth $ 10.23 billion in the company. Rajiv Jain’s GQG Partners increased its holdings in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) by 38% in Q1 to over 9.19 million shares worth $855.51 million and held the most prominent stake in the company.
Baron Funds commented on Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q1 2023 letter. Here is what the fund said:
“Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) contributed in the first quarter due to easing geopolitical concerns and expectations for end-demand recovery later in 2023. We retain conviction that Taiwan Semi’s technological leadership; pricing power; and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT; will allow the company to sustain strong earnings growth over the next several years.”
6. Apple Inc. (NASDAQ:AAPL)
Number of Investors in Q1 2023: 131
Apple Inc. (NASDAQ:AAPL) has been extremely silent on AI innovation even as other tech giants continue to swim in the hype and the buzz. Unknown to most people is that the company has been innovating in technology for the longest time, mostly focusing on the magic for user experience on its products and services. Its already made artificial intelligence an integral part of its products with Siri and other products. Therefore, it has enabled amazing experiences with its products, allowing millions of people to do what they never imagined. Thanks to artificial intelligence technology, Apple products remain some of the most sought-after while going for a premium.
In the first quarter of 2022, 131 hedge funds had a stake in Apple Inc. (NASDAQ:AAPL) compared to 135 in the previous quarter. In Q1, the company’s biggest hedge fund holder, Berkshire Hathaway owned 915.56 million shares of the company worth $150.98 billion.
Apple Inc. (NASDAQ:AAPL) has a consensus rating of ‘Strong Buy,’ with an average price target of $193.57. The highest analyst price target is $240.00, while the lowest forecast is $149.00. The average price target suggests a 2.92% increase from the current price of $188.08.
Apple Inc. (NASDAQ:AAPL) is an AI stock that institutional investors monitor, along with Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co (NYSE:JPM), and Globant SA (NYSE:GLOB).
Manole Capital Management commented on Apple Inc. (NASDAQ:AAPL) in its Q2 2023 letter:
“Despite this, the S&P 500 is up 7% this year and the Nasdaq is up +11%. Technology rebounded from a challenging 2022 and many large tech companies are performing quite well this year. Through mid-May 2023, year-to-date performance of some of the most popular and largest names tech names is impressive. For tech companies with market capitalizations over $1 trillion, Apple Inc. (NASDAQ:AAPL) is up +35%, Microsoft +33%, Amazon +39%, and Google is +40%. In terms of contribution to the S&P 500’s year-to-date return, Apple and Microsoft represent roughly half of its 2023 performance. Apple, and Microsoft now account for 13.9% of the entire S&P 500 or 80% more concentrated than 2008. For additional perspective, Apple’s market cap is at $2.8 trillion and that is larger than the market cap of the entire Russell 2000. To conclude, it’s distinctly getting more concentrated at the top.…” (Click here to read the full text)
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Disclosure: None. Citigroup’s Top 10 AI Stocks to Buy is originally published on Insider Monkey.