The early innings of the artificial intelligence trade may be over, but Citigroup is staying positive on the tech sub-sector, viewing cash flows as the key to unlocking the winners of the next phase. “In sum, our message is not to be overly deterred by the significant year-to-date move in profitable AI stocks,” the bank said in a Friday note to clients. “Medium- to long-term opportunities still exist as the AI theme has an accelerating growth trajectory and attractive [free cash flow] dynamics that should further improve from here.” So far this year anything connected to AI has seen a significant uptick in valuation, with Nvidia shares leading the pack, surging more than 200%. While the jawdropping price action may suggest AI is no longer an early trade, Citi reiterated that the “initial positive thesis” looks intact and warned investors to avoid overlooking free cash flows. Citi expects many names to meet accelerated growth expectations and views free cash flows as “increasingly compelling.” “Profitable stocks within this theme are already impressive cash generating machines,” the bank wrote. “Recent AI developments should accentuate this characteristic and push FCF margins and growth to new highs.” Given this setup, Citi screened for AI-related stocks that are expected to outpace market growth expectations and experience an uptick in free cash flow margins. Here are some of the stocks that made the cut: Amazon has the highest consensus expectation of more than 48% growth over the long term. Shares have gained almost 54% this year as Wall Street rotates back into technology stocks following 2022’s slump. Some investors have viewed the e-commerce giant as lagging behind its peers in the AI race. During an i nterview with CNBC this month, CEO Andy Jassy soothed some of those concerns, reiterating Amazon’s plan to invest in AI across segments. Earlier this year , Amazon also unveiled a generative AI service called Bedrock for its Amazon Web Services unit, allowing clients to use language models to create their own chatbots and image-generation services. Competing chatbot heavyweight Alphabet also made the cut. Shares of the Goolge parent and Bard creator have rallied 38% as it battles it out with Microsoft -backed OpenAI’s ChatGPT. Consensus estimates peg long-term growth at more than 17%, with a near-term free cash flow margin of nearly 24%. GOOGL YTD mountain Alphabet shares in 2023 A handful of financial stocks were also included in Citi’s screen. Mastercard offers the greatest near-term free cash flow yield of the group, at 48.4%. Its long-term consensus growth estimate hovers around 19%. Shares have gained about 15% year to date. Ford Motor , Match Group and ServiceNow also made the list. — CNBC’s Michael Bloom contributed reporting
