AI Boom: Citi Finds Growth Stocks in Uncharted Markets

Citigroup analysts recommend that investors venture into less-trafficked market areas to identify stocks poised to benefit from the artificial intelligence boom, while also adhering to a growth at a reasonable price (GARP) strategy. The tech sector is experiencing increasing caution due to fears of an AI investment bubble, which has clearly separated market leaders from laggards.

Within AI, stock selection is critical, with a focus on companies that yield the best cash returns for their growth capital expenditure. Citigroup advises caution regarding companies that may struggle with self-funding, suggesting an underweight position in such names. While current valuations may not yet signal a full-blown AI bubble, the rapid appreciation of stock prices and elevated valuations are intensifying pressure on businesses.

Adobe is singled out as a compelling earnings play, with projected earnings per share surpassing market-implied growth estimates. Despite recent underperformance, its third-quarter results exceeded expectations, accompanied by robust forward guidance. Semiconductor giants like Nvidia, Advanced Micro Devices, and Micron Technology are also noted for still trading at reasonable valuations, presenting a viable entry into AI infrastructure.