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Artificial Intelligence (AI) has caused a major stir in the stock market, with Nvidia (NVDA) being the catalyst behind the boom. Nvidia’s exceptional quarterly results, attributed to the high demand for their AI-friendly chips, caught the attention of investors. The company’s data center segment, which generates revenue for AI applications, has witnessed robust growth over the last five quarters, with a remarkable year-on-year (YOY) growth rate that has accelerated.
Despite Nvidia’s impressive performance, the stock is trading at a lofty valuation of 76 times earnings, although this valuation has decreased in comparison to the previous year. Experts predict that demand for AI technology will continue to surge, potentially driving Nvidia’s stock price significantly higher.
Three other companies that stand to benefit from the rise of AI include Arista Networks (ANET) and Broadcom (AVGO). Arista Networks, which manufactures switches and routers for large data centers, has experienced slower revenue growth in recent quarters. Nevertheless, the company’s earnings per share increased by 44% in the first quarter of 2024, while it generated $520 million in free cash flow during the same period. Arista’s stock is currently trading at a premium P/E ratio of 42 times earnings, which is lower than Nvidia’s but still relatively high.
Broadcom (AVGO), a renowned technological innovator, has seen slow revenue growth in the past few quarters. However, the recent acquisition of VMware has drastically altered the revenue composition, resulting in an impressive 34% year-on-year revenue growth rate in the first quarter of 2024. Although this figure surpasses Broadcom’s traditional revenue growth, it is still lower than the double-digit percentage points recorded in previous periods. Broadcom is currently trading at a steep P/E multiple of 48, which is considerably higher than one year ago when it traded at around 20 times earnings.
Investors should monitor the integration process of Broadcom’s acquisition of VMware closely. The Motley Fool Stock Advisor recommends keeping an eye on these stocks as they offer potential returns during market sell-offs. Nonetheless, it’s essential to note that Nvidia stock is currently overvalued, and demand for its products might eventually subside, leading to more reasonable stock prices.
The Motley Fool Stock Advisor analyst team has identified ten stocks expected to yield outstanding returns in the near future. Nvidia was not included on this list, which features ten promising investments. By joining the Stock Advisor service, investors receive detailed guidelines on constructing portfolios, regular updates, and biweekly stock recommendations. Since 2002*, the Stock Advisor has surpassed the S&P 500’s performance by fourfold.
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