Investing

AI Stocks Set to Surge: 3 Top Buys in December

Chris MacDonald

Published: December 4, 2024 4:02 pm

The AI sector has seen incredible growth this year, with investors looking to put their capital to work in some of the top high-growth names in the market before the Trump Administration rolls into power and makes the regulatory environment much more attractive for companies operating in sectors with some regulatory overhang. 

Indeed, many of the catalysts that have driven the AI sector higher during the Biden presidency could go into overdrive in the coming months, leading many investors to focus on re-positioning their portfolios toward companies with outsized growth potential. Such a strategy may certainly make sense, but it’s also true that these stocks have rallied significantly since the election. The question is just how much demand has been pulled forward, and whether some companies may have went beyond their skis, so to speak, on their valuations.

That said, for investors looking to buy into this momentum-driven rally, these are the top three stocks I think will continue to get outsized attention in December. There are risks with each of these picks, and they’re not necessarily companies that many investors may want to hold forever. But for those expecting Santa Claus to come this year, here are three stocks that could have major upside before the year is out.

Key Points About This Article:

• This year’s rally in many top artificial intelligence stocks has impressed even the most bullish growth investors.
• Here are three AI beneficiaries that could see significant upside from here, if this amount of bullish sentiment continues for top AI names.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Palantir Technologies (PLTR)

Palantir Technologies (NYSE:PLTR) has emerged as a key tech stock investors have been remiss to not have owned during this recent rally. On a year-to-date basis, PLTR stock is up more than 300%, with a 225% gain seen over the past six months alone. Thus, while Palantir’s rise heading into this year and for the first quarter of 2024 was impressive, it’s the stock’s amplified move higher in recent months (particularly since the election) that’s caught many investors by surprise.

For those who have invested in Palantir for the long-term, perhaps this rise should come as no surprise. The big data company, focused on providing tailored solutions for government organizations looking for data management and intelligence analysis tools, has benefited from very stable and consistent contract growth over time. However, this company was unprofitable for decades, leading some to question whether Palantir could ever turn the corner.

In recent quarters, that dynamic has shifted drastically, with Palantir becoming a cash flow machine. The company’s Q3 earnings highlighted a 54% rise in commercial revenue, fueled by strong demand for its AI code evaluation platform. The thinking many investors have is that this higher-margin commercial business, driven by robust corporate spending on such initiatives, could continue for some time. And as Palantir gobbles up more market share in this lucrative space, it’s earnings growth (43% EPS growth this past quarter) could continue at this rate for a long time.

Now, PLTR stock currently trades at around 150-times forward earnings, so this is a stock that’s far from cheap. Even assuming the company’s 43% EPS growth rate can continue, that’s a PEG ratio of around 4. So, earnings growth will likely need to accelerate, or the stock dip, for some value-conscious fundamental investors to step into this name.

I’d argue that the investor profile for those who are currently buying PLTR stock is likely different, and this momentum-driven move is one that could have legs here. We’ll have to see if the market is right on the earnings acceleration idea, but for now, this is a stock I think most investors will want to watch closely in December.

Taiwan Semiconductor (TSM)

Taiwan Semiconductor (NASDAQ:TSM) is a top chip maker focused on the development of state-of-the art chips via its core foundry business. The company essentially produces high-performance chips for the likes of Nvidia, AMD and others, becoming what many view as a macro play on overall chip growth over the long-term. So, for those who like any of the top chip makers’ growth prospects over the long-term, a company like TSMC that’s expanding its footprint globally and retaining a dominant market position in a high-margin industry should be worth a look.

Notably, Taiwan Semi is working on developing 2nm chips, which the market is expecting to see by 2025. The company’s 3nm chips, launched in Q3 last year, now contribute 30% of revenue. So, if demand for the latest and greatest chips materializes as many expect, there’s plenty of growth acceleration on the horizon – expectations that are currently being baked into the company’s multiple. TSM stock currently trades at around 23-times earnings (not super expensive, but not necessarily cheap compared to this company’s historical multiple). Of course, I’d argue TSM stock is a relative steal in a sector that currently has many chip makers trading well above 23-times sales, let alone earnings. 

Part of this valuation discount has to do with the company’s 15%-20% CAGR projected growth rate moving forward. This growth is expected to mainly come from the company’s fast-growing AI-related chips business, which is expected to grow at a much faster 50% annualized clip, and make up a mid-teens percentage of Taiwan Semi’s overall revenue over time.

I think if the company can grow its core AI-related business faster than the market anticipates, this is a stock that could go on a massive rally in December and beyond.

Alphabet (GOOG)

Alphabet (NASDAQ:GOOG) is the king of search globally, with its core Google business providing one of the greatest cash cows the market has ever seen. Alphabet continues to dominate this market, owning more than 90% global market share and continuing to provide incredible cash flow growth each and every year as online advertising spending continues to trend higher. 

Importantly, Alphabet’s Google Cloud has become a key growth driver investors are increasingly focused on, and for good reason. This segment recently surpassed $11 billion in quarterly revenue and $1.9 billion in operating profit, providing the potential for the company to continue to grow its earnings at a double-digit rate over the next five years. Those are the projections, at least.

I think these projections are certainly on the money, and could actually be under-stating the company’s prospects, considering Alphabet’s growth upside when it comes to AI. The company continues to invest heavily in its home-grown AI solutions it’s integrating within its search and cloud businesses. If these endeavors can propel earnings growth acceleration, the sky’s the limit for this undervalued growth stock.