Last month, my AI-powered stock-picking system, MarketMaster AI, awarded Nvidia (NASDAQ:NVDA) a C-rated “hold” grade. Analysts were still raising their earnings estimates for the chipmaker, which was enough to offset the bearish pressure of high valuations. The result was a relatively muted outlook.
However, my AI-powered stock-picking system downgraded Nvidia to a “D” this month, the equivalent of a “sell.” An unexpectedly strong first-quarter earnings season means shares of the company have now risen too far, too quickly, and MarketMaster AI is taking that cue to downgrade the AI stock. The system forecasts Nvidia will, on average, underperform the market by 3% over the next six months.
That means there are far better AI opportunities now on the market. And the best thing is you don’t have to sacrifice growth or quality for these plays. Here’s where MarketMaster AI believes you should put your money for the next six months.
Microsoft (MSFT)
The world’s largest software maker tops this month’s list of AI stocks to buy. Microsoft (NASDAQ:MSFT) is expected to see earnings growth accelerate to 17% by 2027, and trades at a reasonable 32 times forward earnings. (By comparison, analysts expect Nvidia’s growth to decelerate through 2027, and shares trade at well over 400 times forward earnings).
Driving Microsoft’s gains is Azure, the company’s cloud computing business. The segment grew at 30% in 2023, and analysts believe cross-selling Office customers will keep growth rates high. The rise of AI computing and cybersecurity concerns will also push enterprises towards larger vendors like Microsoft, since few data center operators can afford to build the pricey hyperscalers that AI requires.
MarketMaster AI now sees a 10.5% outperformance over the next six months — the highest upside of any major stock.
Microsoft also tops the algorithm’s list for its relative stability. Unlike Nvidia, which operates in a highly cyclical chipmaking industry, Microsoft’s subscription models have typically provided more stable profits that allow for reinvestment in good times and bad.
Of course, there are some downsides to buying Microsoft.
- High Capital Expenditures. Data centers have high upfront costs. Microsoft’s returns on invested capital have fallen 16% on average over the past three years, and analysts believe it will take Microsoft until 2026 to regain historical profitability.
- Overall Size. Microsoft’s $3 trillion market cap makes supernormal gains less likely.
- Business Model. The company largely generates cash from legacy products like Office and Windows. The firm lags behind in mobile, self-driving and other newer technologies.
Still, MarketMaster AI projects that Microsoft’s recent underperformance relative to Nvidia and other AI stocks gives it a strong potential to trounce markets over the next six months.
Bottom line: MarketMaster AI awards MSFT an “A+” grade and a 10.5% expected outperformance.
Cadence (CDNS)
Shares of Cadence Design Systems (NASDAQ:CDNS) sank 15% in April after the firm announced relatively weak Q1 results and a gloomy second-quarter outlook. Revenues are now expected to only hit $1.04 billion next quarter, a 2% year-over-year increase that mirrors a broader deceleration in AI-related chip spending.
MarketMaster AI sees the selloff as overdone. Shares of this high-quality firm now trade at 40 times 2025 earnings, not much higher than its 5-year average. Cadence’s recent drop in share price has also outpaced analyst earnings cuts, a historical sign of an overdone selloff. MarketMaster AI now projects a 10.4% outperformance over the next six months.
Cadence Design Systems is a provider of electronic design automation (EDA), the software used to design and test semiconductor chips. It’s a duopolistic market that it shares with larger rival Synopsys (NASDAQ:SNPS). Demand for Cadence’s EDS solution has surged in recent years as chips have become more complex. The most advanced AI chips now exceed 100 billion transistors per processor, and each circuit requires some form of planning. Cadence provides these services.
Cadence is particularly strong in analog chips, where it holds an 80% market share, according to Morningstar estimates. Analog chips use less power than digital-design ones and are particularly well-suited for applications like natural language processing in connected devices where battery power is a concern.
Together, these suggest Cadence is a strong candidate to ride out the near-term storm. Though shares have somewhat limited upside because of their still-rich valuation, history tells us it’s better to hit singles in this bearish market than to swing for the fences.
Bottom line: MarketMaster AI awards CDNS an “A+” grade and a 10.4% expected outperformance.
Synopsys (SNPS)
Synopsys is the other half of the EDA market. The larger firm has greater scale and growth prospects than Cadence, and a 5% selloff over the past several weeks has now put it among MarketMaster AI’s top five stocks.
Synopsys is an EDA firm that specializes in digital chip design, the technology that underpins most modern microchips. These integrated circuits are found in everything from programmable chips to flash memory, and the growth of intensive AI applications has put growth into overdrive. In April, Synopsys saw year-over-year revenue growth accelerate to 20.4%, up from 5.7% a year earlier.
MarketMaster AI now sees strong value in the firm. Wall Street analysts have only cut their 2024 earnings estimates for Synopsys by 2% over the past 30 days — a rounding error compared to the stock’s recent double-digit selloff in May. My AI-powered stock-picking system forecasts a 10.2% return over the next six months.
Synopsys also benefits from a solid balance sheet and relatively capital-light business. The company spent just 29% of its cash flow on capital expenditures last year, so a crash in share prices is highly unlikely.
However, investors should note that Synopsys trades close to its justified value. According to traditional discounted cash flow estimates, shares are worth somewhere between $490 to $550, depending on how semiconductor demand evolves. So, even though MarketMaster sees some upside to this stock, please note we’re also batting for singles with Synopsys.
Bottom line: MarketMaster AI gives CDNS an “A+” grade and 10.2% expected outperformance over the next 6 months.
Meta Platforms (META)
Meta Platforms (NASDAQ:META) has long been a strange AI company. The firm generates little revenue from artificial intelligence and has no obvious strategy for monetizing the technology. Its initial large language model (LLM) was leaked in 2023, and the firm has made its subsequent models open-sourced ever since (read: it’s free).
Yet Meta continues to have one of corporate America’s biggest AI budgets. Analysts expect it will remain the fourth-largest spender on hyperscalers, the massive data centers that specialize in AI training. Its AI department is headed by Yann LeCunn, widely considered one of the three “Godfathers of AI.” In other words, Meta seems to be creating an AI solution for a problem that does not yet exist.
That’s why most analysts widely agree that Meta’s AI efforts will somehow pay off. As analysts at Morningstar note:
“We are skeptical that AI investments will deliver meaningful direct revenue benefits, but they should ensure that the firm’s ad platforms remain a top choice among advertisers.”
MarketMaster AI now agrees with this assessment… at least from a quantitative angle. The AI-based system sees 8.9% outperformance over the next six months, comfortably placing Meta in “A+” territory.
One of the largest drivers of this recommendation is Meta’s stunning recovery in profits. Analysts have now revised their 2025 earnings estimates to $23 per share, up from $13 at the start of 2023. This has been driven by a better-than-expected advertising market and significant cost-cutting at the company.
Election years also tend to benefit advertising firms — both in traditional media and online. Political campaigns have turned into massive spending events, and advertising intelligence firm AdImpact believes the 2024 cycle could see spending surpass $10.2 billion this year. Traditionally, that’s raised advertising prices across the board, creating a multiplying effect for all advertisers.
Together, these factors suggest Meta’s stock has more medium-term upside to come. Shares are already up 33% this year, and MarketMaster AI sees even more on the way.
Bottom line: MarketMaster AI gives META an “A+” grade and 8.9% expected outperformance.
Datadog (DDOG)
Finally, Datadog’s (NASDAQ:DDOG) shares plummeted 13% last month after President Amit Agarwal announced he would step down at the end of the year.
That’s turned Datadog, a cloud monitoring service, into a compelling “buy the dip” play. MarketMaster AI awards Datadog a 8.6% outperformance rating over the next six months,
The fundamentals of Datadog remain stellar. In May, the company announced earnings that beat Wall Street expectations and raised its guidance for the remainder of the year. The company now expects revenues to hit $2.6 billion this year, compared to prior estimates of $2.56 billion. Projected earnings per share was raised 9% to $1.54.
Short interest has also been steadily falling, which is a strong signal that bears are throwing in the towel. Less than 10 million shares are now sold short, down from 14 million last year.
Most importantly, Datadog finds itself on the “right” side of the AI revolution. The company provides cloud-based monitoring services, and the rise of AI means enterprises will need to increasingly worry about spiraling costs. Datadog’s services both help customers migrate to these cloud servers and monitor their usage afterward.
That tells us that concerns over succession are likely overblown. Agarwal will remain on the board, and the company’s youngish CEO (age 47) still has plenty of time to find a successor.
Bottom line: MarketMaster AI gives DDOG an “A+” grade and 8.6% expected outperformance.
What About Nvidia (NVDA) and Super Micro (SMCI)?
D-rated Nvidia is only expected to churn out 3% returns by December. Shares of this hot stock have risen too quickly, and history tells us that a pullback could last longer than most expect. F-rated Super Micro (NASDAQ:SMCI) has even worse prospects. MarketMaster AI believes that, on average, companies like Super Micro will lose 0.7% relative to the market. Only three companies score lower in this update.
In other words, traders should be increasingly cautious about chasing the market too much higher. In August 2023, The Wall Street Journal compared the AI stock mania to the dot-com bubble. Reuters made the connection even earlier. And now that the selloff of AI stocks has finally begun, traders should be careful about buying the dip.
That said, there are plenty of high-quality firms that still show good value. And though the days of 5x upside in the AI world are likely behind us, there are still plenty of opportunities for patient investors who are willing to wait for a turnaround to happen.
On the date of publication, Thomas Yeung held no positions in stocks mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.