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There are a number of stocks that are well-positioned to benefit from the rise in advancements and adoption of AI technologies and this article focuses on news about the 6 most prominent companies at the forefront in AI's development and the major supplier of chips that make such development possible.

What Is A Mega Stock?

A mega cap stock is defined as a company with a market capitalization (the value of its outstanding shares) above $200 billion but in this article, the mega stock label is limited to the 6 stocks  with market capitalizations in excess of $800B involved in the development of the sector and the major supplier of bits and qbits to make it possible.

What Is Artificial Intelligence (AI)?

As defined by IBM, (I paraphrase) AI combines computer science and robust datasets, including machine learning and deep learning, into AI algorithms that seek to create expert systems that make predictions or classifications based on input data.

What Is Generative AI?

When it comes to generative AI (which takes raw data and “learns” from it to generate statistically probable outputs when prompted to create a new work that’s similar, but not identical, to the original data) it is predicted that foundation models will dramatically accelerate AI adoption in the enterprise.

What Is An AI Chatbot?

A chatbot is a computer program that uses conversational AI techniques like natural language processing to understand the user’s questions and automate responses to them as if they were communicating with a real person be they rudimentary programs that answer a simple query with a single-line response, or sophisticated digital assistants that learn and evolve to deliver increasing levels of personalization as they gather and process information.

What Is Quantum Computing?

Quantum computing, unlike classical computing where data is known as a bit which can be either 0 or a 1 thus giving it binary qualities, uses qubits instead of bits and they exist in any proportion of both states at the same time (superposition) and can be entangled or invisibly connected (i.e., if one qubit is altered, the other reacts at the same time allowing such computers to process vast amounts of information simultaneously) and this permits an enormous leap in processing power.

Each of the stocks in munKNEE's new "The Magnificent Seven" AI-themed Mega-Cap Stocks Index is described below as to:

• its relationship to AI within its business operation,
• its current market capitalization,
• its YTD stock price appreciation (as of October 12th), ranked in descending order,
• its valuation metrics (see definition of each metric below) consisting of its most recent:
  • Forward Price-to-Sales Ratio (PSR),
  • Forward Price-to-Earnings (PE) Ratio and
  • Forward Price-to-Earnings Growth (PEG) Ratio.
  • Please note that the metrics change daily as their stock prices change.

"The Magnificent Seven" AI-themed Mega-Cap Stocks Index

1. NVIDIA Corporation (NVDA): UP 221% YTD
   • designs the best-in-class graphics card for AI and machine learning processing (MLP) and compute and networking solutions.
   • Market Capitalization: $1.16T;
   • Forward Price-to-Earnings (PE) Ratio: 43.2 (very high);
   • Forward Price-to-Sales Ratio (PSR): 21.6 (very high);
   • Expected earnings increase over the next 12 months: 59.3% (excellent);
   • Forward Price-to-Earnings Growth (PEG) Ratio: 1.30 (excellent)
   • Read:
     • AI fever and elevated demand raise the bar for Nvidia margin expectations
     • 2 Best Chip Stocks to Buy on Soaring AI Demand
2. Meta Platforms (META): UP 169% YTD
   • has announced that it:
     • has trained its new AI virtual assistant using public posts from Facebook and Instagram, while taking measures to exclude private data and respect user privacy. Source: Reuters.
     • is set to unveil several generative AI chatbots with personalities, apparently with an eye toward attracting young users (see here), and is developing a more powerful large language model to rival OpenAI’s latest work with GPT-4, the model that underpins ChatGPT and Bing, for release next year.
   • Market Capitalization: $834B;
   • Forward Price-to-Earnings (PE) Ratio: 24.4;
   • Forward Price-to-Sales Ratio (PSR): 6.3;
   • Expected earnings increase over the next 12 months: 12.9%;
   • Forward Price-to-Earnings Growth (PEG) Ratio: 1.09 (excellent)
   • Read:
     • Barclays Analysts See Meta as Well-Positioned for Growth in AI
     • Meta starts rolling out generative AI tools for all advertisers
3. Tesla Inc. (TSLA): UP 110% YTD
   • Tesla’s innovations in the field of AI are huge and Elon Musk recently claimed that Tesla is becoming known more as an AI and robotics company than anything else.
   • Elon Musk has his sights set on challenging OpenAI in the artificial intelligence startup space with the creation of a new AI company, X.AI Corp.  as part of a wider plan to create a so-called everything app under the brand “X." Since it was just founded in July, and is privately held, its scope of work is not yet known.
   • Market Capitalization: $822B;
   • Forward Price-to-Earnings (PE) Ratio: 76.2 (extremely high);
   • Forward Price-to-Sales Ratio (PSR): 8.3 (high);
   • Expected earnings increase over the next 12 months: 23.0% (excellent);
   • Forward Price-to-Earnings Growth (PEG) Ratio: 3.86 (poor)
   •  Read:
     • Top Stock in Cathie Wood's Portfolio With Serious AI Upside
     • Tesla's $300 Million AI Cluster Is Going Live Today
     • Missed Out on Nvidia? 2 AI Stocks to Buy Now
4. Alphabet Inc. (GOOGL): UP 57.5% YTD
   • has built a programmable superconducting processor that is about 158 million times faster than the world’s fastest supercomputer and is continuing to push innovation in quantum computing, from hardware control systems and quantum control to physics modeling and quantum error correction.
   • has released its newest AI chatbot version of Bard (see here) whose new features elevate Bard from a regular chatbot into something much closer to a personal assistant.
   • Market Capitalization: $1.76T;
   • Forward Price-to-Earnings (PE) Ratio: 24.6;
   • Forward Price-to-Sales Ratio (PSR): 5.8 (poor);
   • Expected earnings increase over the next 12 months: 10.5% (low);
   • Forward Price-to-Earnings Growth (PEG) Ratio: 1.44 (excellent)
   • Read:
     • Google's patent may save some power on AI development; 
     • Alphabet Focuses on Efficiency with New AI Chip
     • Google unveils new AI products at 2023 Cloud Next event
5. Amazon.com Inc. (AMZN): UP 57.5% YTD
   • is a cloud service provider, implementing AI across suite of consumer products (retail)
   • has partnered with the California Institute of Technology to foster the next generation of quantum scientists and fuel their efforts to build a fault-tolerant quantum computer.
   • has announced the general availability of Bedrock, a service that allows Amazon Web Services customers to build apps on top of generative AI models and customize them with their proprietary data to create AI “agents” that can automatically execute tasks like booking travel, managing inventory and processing insurance claims, from Amazon itself and third-party partners through an API;
   • is initially investing $1.25 billion for a minority stake in Anthropic (see here) which, like Google’s Bard and Microsoft-backed OpenAI, also operates an AI-powered, text-analyzing chatbot and has the option to increase its investment in Anthropic to a total of $4 billion. Anthropic plans to build a “frontier model” chatbot that is 10 times more capable than today’s most powerful AI but cautions that it will require a billion dollars in spending over the next 18 months.
   • Market Capitalization: $1.37T;
   • Forward Price-to-Earnings (PE) Ratio: 61.5 (very high);
   • Forward Price-to-Sales Ratio (PSR): 2.4 (good);
   • Expected earnings increase over the next 12 months: 11.8%;
   • Forward Price-to-Earnings Growth (PEG) Ratio: 1.61 (excellent)
   • Read:
     • AI predicts Amazon stock price for the end of 2023
     • Of All the AI Stocks, These 2 Impressed Me the Most This Earnings Season
6. Microsoft Corporation (MSFT): UP 49% YTD
   • is a cloud service provider, implementing AI across suite of consumer products (Office Suite, OpenAI)
   • is developing a quantum computing machine using a proprietary control chip and a cryo-compute core that work together to maintain a stable cold environment and offers a portfolio of quantum computers from other hardware providers as a service to provide an open development environment for researchers, businesses and developers that enables the flexibility to tune algorithms and explore today's quantum systems.
   • OpenAI, backed by Microsoft, has announced that ChatGPT users (OpenAI is still limiting who can use the latest version) now have the ability to:
     • • browse the internet, expanding its data access beyond its initial September 2021 knowledge cutoff. (Reuters) and interact with AI through text, images, and even videos (referred to as “multimodality”) and make sense of them.
   • The chatbot's ability to assist with creative tasks, solve complex problems, and generate images using Bing's Image Creator sets it apart from other search engines.
   • The upcoming integration of Bing Chat into Windows 11 through Windows Copilot further emphasizes Microsoft's vision for a more interactive and informative search experience. Source
   • Market Capitalization: $2.46T;
   • Forward Price-to-Earnings (PE) Ratio: 30.1;
   • Forward Price-to-Sales Ratio (PSR): 10.4 (high);
   • Expected earnings increase over the next 12 months: 11.9%;
   • Forward Price-to-Earnings Growth (PEG) Ratio: 2.36 (good)
   • Read:
     • ChatGPT predicts Microsoft stock price after gaining approval to buy Activision
     • A Bull Market Is Coming: 2 AI Growth Stocks That Brilliant Money Manager Ken Griffin Is Buying Hand Over Fist
     • OpenAI has already surpassed $1.3 billion in revenue
7. Apple Inc. (AAPL): UP 39% YTD
   • large technology platform, integrates AI through products
   • Market Capitalization: $2.83T;
   • Forward Price-to-Earnings (PE) Ratio: 29.8;
   • Forward Price-to-Sales Ratio (PSR): 7.4 (high);
   • Expected earnings increase over the next 12 months: 6.0% (very poor);
   • Forward Price-to-Earnings Growth (PEG) Ratio: 3.12 (high)
   • Read:
     • Is Apple Priced to Perfection, Based on Its Current P/E?
     • AI predicts Apple stock price for the end of 2023

Future Expectations

AI's contribution to the revenue of each of the above companies is not a reality in 2023 but, that being said, however, recent and on-going, developments in AI have created extremely high expectations for these companies moving forward.

According to a research note from analysts at Goldman Sachs,  the average Magnificent Seven mega-cap stock is currently trading at a 1.3x PEG ratio compared with 1.9x for the median S&P 500 stock. As such, on average, they now cheaper relative to the S&P 500 than at any point in the past six years and are poised to outperform in the fourth quarter based on earnings expected to increase by 22% over the next 12 months (half that if Nvidia is excluded from the calculation).

Summary

The average market-cap of the above 7 AI-themed mega-cap stocks is $1.61T and they are UP 100.8%, on average, YTD

Definitions

The Price-to-Sales ratio (PSR) describes how much someone must pay to buy one share of a company relative to how much that share generates in revenue for the company. and, as such, determines whether its stock is cheap or overpriced in comparison to its peers. While the ideal ratio depends on the company and industry, the ratio is typically good when the value falls between one (1)  and two (2) and a ratio of less than one (1`) is even better. 

The price/earnings to growth ratio (PEG ratio) is considered to be an indicator of a stock's true value. A PEG lower than 1.0 is best, suggesting that a company is relatively undervalued.

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