Artificial Intelligence, October addition – how to benefit

Artificial intelligence is one of the fastest-growing sectors in 2024, yet the Nasdaq CTA Artificial Intelligence Index has significantly underperformed the broader stock market. In this article, I’ll analyze the AI sector’s performance, provide a deeper outlook for October 2024 and beyond, and highlight emerging AI players and promising stocks to watch this month.

Comparison of Artificial Intelligence Stock Indices with the broad stock market performance

Below, I analyze the Nasdaq CTAArtificial IntelligenceIndex (NQINTEL) ‘s year-to-date performance and compare it with the performance of the broad stock market index with high exposure to the technology sector Nasdaq (NDX). It is worth noticing that since the beginning of this year,NQINTEL has returned only +1.71%, while theNasdaq Index surged by 21.30% year-to-date.

The Artificial Intelligence Index has 83.69% exposure to the technology stocks, focusing on artificial intelligence utilization in its products and services.

So, why have we witnessed so much underperformance for the NQINTEL Index with artificial intelligence exposure? TheNasdaq CTA Artificial Intelligence Index (NQINTEL)underperformed the broader Nasdaq Index in 2024 for several reasons, in my view:

• Sector-Specific Challenges: Companies within the AI sector faced unique challenges, such asregulatory scrutinyandethical concernsover AI deployment, which impacted investor sentiment and stock performance.
  • Implementation of the EU AI Act: This comprehensive regulation began to significantly impact AI companies, requiring them to ensure compliance with stringent guidelines on transparency, accountability, and risk management.
  • Copyright Infringement Litigation: There was an increase in lawsuits related to the use of copyrighted material in training AI models. Companies had to navigate complex legal landscapes to avoid potential infringements.
  • Privacy and Data Protection: With growing concerns over data privacy, AI companies had to implement robust measures to protect personal data and comply with regulations like GDPR.
  • Algorithmic Bias and Fairness: Regulators demanded greater transparency and fairness in AI algorithms to prevent discrimination and bias, pushing companies to develop more ethical AI systems.
  • Cybersecurity Risks: Integrating AI in various sectors raised new cybersecurity challenges, requiring companies to enhance their security protocols to protect against potential threats.
  • In September, several companies faced significant regulatory scrutiny: Google (Alphabet Inc.) for its dominance in the Search and advertising market; AAPL (Apple Inc.) for its App Store practices; AMZN (Amazon) for concerns related to the market practices and treatment of third-party sellers; and META (Meta Platforms) for privacy and data protection concerns.
  • In addition, many small AI startups lack the resources to implement robust guidelines and security measures, making them more vulnerable to misuse of AI applications.
• High Valuations: Many AI companies had high valuations, leading to increased volatility and susceptibility to market corrections. Investors became cautious, leading to a pullback in stock prices. I believe many companies included in the NQINTEL Index look highly overvalued based on P/E and P/Sales ratios. Among the most overvalued stocks, I see PLTR (Palantir), which trades at a forward P/E of 103.05x, and S (SentinelOne), which trades at a forward P/E of 756.80x, ALAB (Astera Labs) – which trades at forward P/E of 91.60x.
• Technological Hurdles: Some AI companies struggled with technological advancements and scalability issues, which slowed their growth and affected their stock performance. Based on my search, I found a few artificial intelligence companies that faced challenges and reduced their revenue growth guidance in 2024:
  • ASML Holding: The company struggles with export restrictions. The U.S. and Dutch governments have restricted selling ASML’s most advanced lithography systems to China, which limits ASML’s market and could impact revenue.
  • Akamai Technologies (AKAM):The company’s Q3 2024 EPS is expected to remain flat quarter-on-quarter and decline from $1.63 in Q3 2023 to $1.59 in Q3 2024. Rising operational costs, including investments in infrastructure and technology, can squeeze profit margins. If these costs increase faster than revenue, it can lead to weaker financial results.Regulatory Challenges: Changes in data privacy regulations and cybersecurity laws across different regions can impose additional compliance costs and operational challenges forAkamai.
  • Ansys Inc. (ANSS): The company encountered operational challenges this year.High-Performance Computing (HPC) Issueson Windows HPC clusters were due to poor affinity handling by Microsoft HPC Pack. This could affect the efficiency of simulations run on these systems.Software Limitationsin Ansys Fluent 2024 R2, such as issues with the strain rate equation in combustion simulations, could impact the accuracy and performance of certain simulations.Platform Support: Ensuring compatibility and optimal performance across various platforms and systems is always challenging. Ansyshas to address these issues to maintain smooth operations, in my opinion.
    
• Competition: The AI sector saw increased competition, both from established tech giants and new entrants, which put pressure on profit margins and growth prospects.
  • Dynatrace Inc. (DT): The company faces strong competition in Application Performance Monitoring (APM). Current competitors include Datadog (DDOG), New Relic, AppDynamics, andIBM Instana.
  • Nvidia: continues to be a major force in AI hardware, competing with companies like AMD and Intel
  • Microsoft: with its Azure AI services faces fierce competition with Amazon Web Services (AWS) and Google Cloud in the cloud AI market
  • OpenAI: as a pioneer in generative AI, OpenAI faces strong competition from other AI research labs and companies like Anthropic and DeepMind.
  • META: the company is heavily investing in AI for social media and virtual reality, competing with companies like SNAP and TikTok.

AI exposed stocks which significantly outperformed the NQINTEL Index

Some AI-exposed stocks have seen tremendous growth in 2024, withNvidia, in particular, hogging much of the spotlight for its massive spike in value (+145.14% year-to-date).
Meta Platforms, Inc. (META)andArista Networks, Inc. (ANET)have also seen significant returns, with 60.29% and 61.46% year-to-date growth, respectively. Palantir has seen impressive year-to-date growth of 119.47%.Palantirdemonstrated high business execution, particularly in the U.S. commercial and government sectors. This solid performance boosted investor confidence. The company’s unique position in the enterprise AI market played a significant role. Palantir’s AI software solutions saw booming demand, leading to substantial stock outperformance. In Q1 2024, Palantir reported a 21% annual revenue increase, with U.S. commercial revenue soaring by 68%. This growth momentum continued throughout the year. Palantir’s leadership in the AI industry and ability to leverage AI for business solutions underscored its potential for continued success.

Upon analyzing the performance of the AI-exposed Index, I found that only a small number of stocks have outperformed the broader market year-to-date. These outperformers are primarily large-cap companies that already hold leading positions in AI-exposed sectors. In contrast, most mid-cap stocks have underperformed the market. The majority of mid-sized AI-exposed companies remain unprofitable, struggling with industry competition and challenges. Of the 50 companies currently included in the NQINTEL Index, only 12 have outperformed the market. This is clearly insufficient for the NQINTEL Index to surpass the broader market.

Outlook for October 2024 and beyond

Despite the challenges which I highlighted above in my research, the outlook for the artificial intelligence industry for October 2024 and 2025 is incredibly positive.

According toFortune Business Insights, the global artificial intelligence (AI) market size was valued at $515.31 billion in 2023 and is projected to grow from $621.19 billion in 2024 to $2,740.46 billion by 2032, exhibiting a CAGR of 20.4% during the forecast period. North America dominated the global market with a share of 41.23% in 2023.

AI spending is predicted to compound 36% annually through 2030, suggesting strong long-term growth potential for AI stocks. Many software and IT services, banking, and retail companies invest most of their capital in artificial intelligence. According toIDC, these three industries are projected to allocate approximately $89.6 billion towards AI in 2024, representing 38% of the global AI market. Several technology giants are leading the investments in artificial intelligence development.Microsofthas significant investments in OpenAI, including a $10 billion corporate minority stake.Google (Alphabet)invests heavily in AI startups and development platforms such as Anthropic.Amazonalso backs startups and integrates AI across its services.Nvidiais known for investing in AI hardware and software, including funding rounds for companies like Databricks.Applecontinuously investing in AI to enhance its product ecosystem.

According to experts’ projections total global investments in the AI industry should increase from $115 billion in 2024 to $198 billion in 2025.

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Artificial Intelligence Industry Leaders

By analyzing the current artificial intelligence market stance, I concluded that the emerging leaders in the industry will be companies like OpenAI, which will continue pushing its boundaries with models like GPT-4 and beyond. I also would like to highlight Google DeepMind, which remains at the forefront of AI research, particularly in reinforcement learning and healthcare applications. Nvidia will also retain its leadership position in AI hardware while expanding its influence with AI software and platforms. Microsoft will remain to be a key player in the AO landscape.

Artificial Intelligence Emerging Players

Besides the well-known suspects, however, I would like to highlight some new players that could be emerging AI industry leaders for 2025-2026. Based on my research, below I mention these companies:

Companies planning to IPO in 2025:

Rebellions Inc.:

• Rebellions Inc.is a South Korean artificial intelligence chip design startup founded in 2020. The company specializes in developing AI accelerators by bridging the gap between underlying silicon architectures and deep learning algorithms. Rebellions has successfully launched two AI chips within three years and has raised over $225 million in funding from investors worldwide. Rebellions’ AI products include thePhi3-mini/small, an advanced AI model focused on text generation and reasoning tasks. The company is also working on a next-generation AI chip in a strategic partnership with Samsung Electronics. Rebellions is considered an emerging leader in the AI chip market. The company has secured significant funding, including $124 million from investors, including KT Corp., to accelerate the development of a next-generation AI chip and a $15 million Series B extension funding round by Wa’ed Ventures. Rebellions are also planning to go public as early as the end of 2025, seeking to capitalize on the booming demand for AI chips. In 2024, Rebellions signed a definitive merger agreement with Sapeon Korea Inc., another South Korean AI chip developer. The merged company will retain the name “Rebellions” and will be headed by Rebellions’ CEO Park Sung-hyun.

Cerebras Systems:

• An AI chip firm that recorded an over threefold jump in annual revenue in 2023 has filed for an IPO.Cerebras Systemsis an American artificial intelligence (AI) company that designs processors for AI training and inference and builds AI systems to power the processors and feed them data. They have offices in Sunnyvale, San Diego, Toronto, Tokyo, and Bangalore, India. The company has developed a 5nm-based, 4 trillion transistor chip with 900,000 AI-optimized compute cores, providing 125 petaflops of peak AI performance.
• Cerebras has seen significant growth, with an estimated $250 million in sales in 2023, representing 201% growth year-over-year from about $83 million in 2022. The company recently announced that it was on track to double in 2024, with total customer commitments approaching $1 billion. In 2021, Cerebras raised $250 million in a series F financing round, valuing it at more than $4 billion.
• I figured out that, the company’s performance is groundbreaking in specific scenarios, particularly AI inference, where the chip can process inputs at speeds reportedly 20 times faster than Nvidia’s solutions. Mayo Clinic selected Cerebras as its first generative AI collaborator because of its large-scale, domain-specific AI expertise in accelerating breakthrough insights. Cerebras Systems addresses the increasing demand for computational power in AI, making it a key player in a rapidly expanding industry.
• Cerebras filed its prospectus for an initial public offering (IPO) in September 2024, planning to raise up to $1 billion, according to news atCNBCandBloomberg. The company would be among the first AI companies to go public since the release of ChatGPT nearly two years ago.
• Cerebras has signed a Memorandum of Understanding (MoU) with Saudi Aramco to help accelerate the deployment of AI. Aramco will build, train, and deploy world-class large language models (LLMs) using Cerebras’ industry-leading CS-3 systems. Cerebras Systems and Aleph Alpha are teaming up to develop sovereign artificial intelligence (AI) solutions.

SymphonyAI:

• The company targets a second-half 2025 IPO with a $500 million revenue run rate.SymphonyAIis a U.S.-based artificial intelligence company that provides predictive and generative AI software as a service (SaaS) to help businesses solve specific challenges and supercharge revenue growth. Their solutions focus on industries like retail, consumer packaged goods, financial services, and more. The company’s products assist clients in predicting demand and detecting fraud. SymphonyAI was founded by Romesh Wadhwani, a successful entrepreneur who has committed $1 billion of his own capital to build the company (Romesh Wadhwani).
• SymphonyAI has demonstrated strong growth, with a $500 million revenue run rate, and is reportedly planning to go public in the second half of 2025. This IPO would be a significant milestone, providing the company with more resources to expand its offerings and further establish itself as a major player in the AI industry.
• The company’s focus on predictive and generative AI, which can help businesses solve complex problems and drive growth, positions it well to take advantage of the increasing demand for AI solutions across industries. SymphonyAI’s leadership team, which includes experienced innovators and industry experts, is another factor that could contribute to its success in 2025.

The business models of the companies mentioned earlier are intriguing and show promise. I recommend that investors keep a close eye on these names. They could potentially challenge established AI leaders like Nvidia. In particular, Cerebras Systems stands out as a company that could emerge as a strong competitor to Nvidia by 2025-2026. Cerebras is already positioning itself as a major player in the AI chip market, rivaling Nvidia.

Cerebras’ third-generation chip, the WSE-3, outperforms Nvidia’s H100 in core count, memory capacity, and physical size, which can enhance performance for certain AI workloads. In a significant vote of confidence, G42 committed to purchasing $1.43 billion worth of Cerebras products by March 2025. This investment strengthens Cerebras’ financial position and market presence.

As I mentioned above, Cerebras has filed for an IPO, planning to trade as “CBRS” on the Nasdaq. This move is likely to secure substantial funding for further innovation and growth. Unlike Nvidia’s focus on GPUs, Cerebras offers a distinct approach with its wafer-scale engine (WSE) technology. This differentiation could appeal to customers seeking specialized AI solutions.

Promising AI Stocks to Watch in October

Below I highlight promising Artificial Intelligence Picks for October:

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