Wall Street rebounded in the first half of 2023 after a highly disappointing 2022. The rally was primarily led by growth stocks, especially technology stocks. However, technology stocks suffered a setback in August.
Out of the 11 broad sectors of the market’s benchmark the S&P 500 Index — the Technology Select Sector SPDR (XLK) fell 1.4% in the past month. The closely linked Communication Services Select Sector SPDR (XLC) also declined 2.3% in the same period.
In August, the tech-heavy Nasdaq Composite was down 2.2%, marking its worst month since November 2022. The tech-laden index terminated a five-month winning streak. However, the technology sector resumed its northbound journey last week. The Nasdaq Composite advanced 1.4% last week, marking its best weekly performance since July.
Artificial Intelligence (AI): A Major Driver
The tech rally in the first half was led by a massive thrust toward AI, especially generative AI. However, a section of technical and financial experts has warned that the AI space is much hyped and likely to form a bubble.
In this regard, blockbuster earnings results and robust guidance seen in recently reported results of NVIDIA Corp. NVDA — the largest global manufacturer of generative AI chipsets — raised expectations of investors that the market for AI will show strong growth in the coming decade.
The AI market has gathered pace in the past few years buoyed by the rapid penetration of digital technologies and the Internet. Importantly, COVID-19 acted as a major catalyst. Social distancing and lockdowns were the key features of the pandemic-ridden period between 2020 and 2022. People across the world have no option but to rely on the Internet and digitization for survival.
This enormous opportunity compelled technology behemoths to invest significantly in R&D activities, especially in the high-end AI space. This space received tremendous demand from end-use verticals like automotive, healthcare, banking and finance, manufacturing, food and beverages, logistics, and retail to name a few.
Over the years, NVIDIA has shifted its focus from PC graphics to AI-based solutions that support high-performance computing, gaming and virtual reality platforms. Its A100 and H100 AI chips are used to build and run AI applications, including OpenAI’s ChatGPT.
NVIDIA’s CEO Jensen Huang said, “During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures. Leading enterprise IT system and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI.”
The market for AI is expected to show strong growth in the coming decade. Its current size of nearly $200 billion is expected to grow to nearly $2 trillion by 2030 as estimated by several research agencies.
Our Top Picks
We have narrowed our search to five U.S. technology behemoths that have strong earnings growth potential for the rest of 2023. These stocks have seen positive earnings estimate revisions in the last 30 days. Each of our picks currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
NVIDIA Corp. reported second-quarter fiscal 2024 adjusted earnings of $2.70 per share, surpassing the Zacks Consensus Estimate of $2.09. NVDA posted revenues of $13.51 billion for the quarter, outpacing the Zacks Consensus Estimate by 20.89%. Management sees third-quarter revenues of $16 billion versus the Zacks Consensus Estimate of $12.34 billion.
NVIDIA has an expected revenue and earnings growth rate of 93.1% and more than 100%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 30.8% over the last seven days.
Workday Inc. WDAY has been benefiting from solid momentum in the human capital and financial management portfolio. WDAY’s cloud-based business model is increasingly gaining traction. Strong emphasis on the integration of generative AI in WDAY products and the development of various AI-driven applications to drive more value is a tailwind.
Workday has an expected revenue and earnings growth rate of 16.1% and 46.2%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last seven days.
Super Micro Computer Inc. SMCI designs, develops, manufactures and sells energy-efficient, application-optimized server solutions based on the x86 architecture. SMCI’s solutions include a range of rack mount and blade server systems, as well as components. SMCI emphasizes superior product design and uncompromising quality control to produce industry-leading server-boards, chassis and server systems.
Super Micro Computer has an expected revenue and earnings growth rate of 37% and 31.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 53.6% over the last 30 days.
Splunk Inc. SPLK is witnessing significant customer additions and multiple projects wins in the public and private sectors driven by its enterprise scale and unified product portfolio. SPLK teamed up with Microsoft to enable customers to migrate, modernize and enhance their business environment with comprehensive cloud and hybrid visibility on a large scale.
SPLK is committed to enhancing its core platform and premium products with advanced AI capabilities. SPLK AI encompasses a range of AI-powered solutions that seamlessly blend automation with human input.
Splunk has an expected revenue and earnings growth rate of 7.9% and 39.8%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 6.2% over the last seven days.
Paylocity Holding Corp. PCTY is benefiting from the growing adoption of its solutions among clients with less than 50 employees. Healthy momentum in PCTY’s core and upper end of the market is a tailwind. The release of the Learning Management System and Community portal, which garnered positive feedback from clients, is encouraging.
PCTY’s regular investments in technological upgrades, along with product innovation, will continue to boost its top line. The addition of on-demand pay to its portfolio is likely to generate more client wins. We expect PCTY’s revenues to witness a CAGR of 23.4% through fiscal 2023-2025.
Paylocity Holding has an expected revenue and earnings growth rate of 19.9% and 8.4%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 5.9% over the last 30 days.
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NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Super Micro Computer, Inc. (SMCI) : Free Stock Analysis Report
Splunk Inc. (SPLK) : Free Stock Analysis Report
Workday, Inc. (WDAY) : Free Stock Analysis Report
Paylocity Holding Corporation (PCTY) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
