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Citigroup Remains Positive on AI Stocks, Stresses Importance of Cash Flows
AI Stocks Still Have Long-Term Potential, Says Citigroup
Citigroup believes that despite the significant gains in profitable AI stocks this year, the early innings of the artificial intelligence trade are not over. The bank emphasizes that medium- to long-term opportunities still exist as the AI sector continues to experience accelerating growth and attractive free cash flow dynamics. While the valuation of AI-related stocks has skyrocketed, with Nvidia leading the pack, Citi suggests that investors should not overlook the importance of free cash flows in determining the winners of the next phase of the AI theme. The bank expects many AI stocks to meet accelerated growth expectations and views free cash flows as increasingly compelling.
Citi Highlights AI Stocks with Strong Growth Expectations and Free Cash Flow Margins
Citi has screened for AI-related stocks that are expected to outpace market growth expectations and experience an uptick in free cash flow margins. Some of the stocks that made the cut include:
1. Amazon
Amazon is projected to have the highest consensus expectation of more than 48% long-term growth. The company's shares have already gained almost 54% this year, benefiting from increased investor interest in technology stocks. While some have criticized Amazon for lagging behind its peers in the AI race, CEO Andy Jassy has reassured investors about the company's plans to invest in AI across segments. Amazon has also introduced a generative AI service called Bedrock, which allows clients to create their own chatbots and image-generation services using language models.
2. Alphabet
Alphabet, the parent company of Google and creator of Bard, has seen a 38% rally in its shares as it competes with Microsoft-backed OpenAI's ChatGPT. Consensus estimates project long-term growth of over 17% for Alphabet, with a near-term free cash flow margin of nearly 24%.
3. Mastercard
Mastercard offers the highest near-term free cash flow yield among the financial stocks screened by Citi, at 48.4%. The company has a long-term consensus growth estimate of around 19%. Mastercard's shares have gained approximately 15% year to date.
4. Ford Motor, Match Group, and ServiceNow
Other stocks that made Citi's list of AI-related stocks with strong growth expectations and free cash flow margins include Ford Motor, Match Group, and ServiceNow.
In conclusion, Citigroup remains optimistic about the potential of AI stocks, suggesting that the significant gains this year should not discourage investors. The bank believes that AI stocks with strong cash flows and the ability to meet accelerated growth expectations will be the winners in the next phase of the AI theme.
Conclusion: AI Stocks and the Potential Impact on New Businesses
The assessment provided by Citigroup regarding the positive outlook for AI stocks, with an emphasis on the importance of cash flows, holds valuable implications for new businesses entering the space. As the AI sector continues to grow and attract significant investor interest, it presents an enticing opportunity for entrepreneurs to tap into this burgeoning market.
Citigroup's suggestion that investors should consider the long-term potential of AI stocks aligns well with the outlook for new businesses. This emerging sector still has room for growth, indicating that there are ample opportunities for innovative startups to carve out their niche.
The focus on cash flows as a determinant of success in the AI theme is crucial for new businesses to consider. Demonstrating the ability to generate attractive free cash flow margins will not only attract investors but also provide the financial stability needed for sustainable growth and further innovation.
The highlighted AI stocks, such as Amazon, Alphabet, Mastercard, Ford Motor, Match Group, and ServiceNow, offer valuable insights for potential new players. Studying the strategies and performance of these market leaders can provide guidance to startups looking to establish themselves in the AI industry.
Overall, the continued optimism surrounding AI stocks and their long-term potential signifies a fertile ground for new businesses. By prioritizing cash flows, staying attuned to market growth expectations, and fostering innovation, entrepreneurs can position their ventures to thrive in this promising sector.
Article First Published at: https://www.cnbc.com/2023/07/24/citi-stays-positive-on-ai-theme-and-lays-out-the-key-to-finding-winning-stocks.html.svg)
