AI stocks have become quite popular the more AI becomes. We’ve seen prices fly in recent weeks. Does that mean they’re in a bubble? Or is AI investing here to stay?
Everyone seems to be talking about AI these days. Half the market will tell you it’s a bubble, and the other half will tell you it will power the world for generations. When an entire industry gets this much attention, investors will always notice.
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AI Stocks Introduction
Investing in AI companies has been a popular subject in recent months. AI or artificial intelligence isn’t a new concept and has existed for several decades. But in November 2022, the company OpenAI launched its generative AI chatbot, ChatGPT, which changed how the world viewed AI and machine learning.
Since then, nearly every major tech company has integrated AI into their technologies. AI is in nearly every form of technology, from electric vehicles to robotics to content creation. Some say AI will replace most human work and labor over the next few decades.
How to Invest in AI Stock Sectors
As with any industry, the true AI leaders will eventually rise to the top. Right now, there is a frenzy involved in every company that mentions AI in their earnings report or product release.
Investing in AI isn’t just about picking companies with AI in their name. You will want to learn about the different sectors that contribute to the AI industry. Here are a few of those sectors.
1. Semiconductors
Semiconductors or chips, as they are also known, are the brains behind all of our cutting-edge technologies. They are also required to power the energy-intensive process of machine learning and generative AI.
The more advanced the chip, the faster the processing speeds and the less energy required. This is why semiconductor stocks have been on fire over the past year. Without these chips, it would be impossible for these AI models to operate at such high speeds.
2. AI Software
Just as OpenAI changed the world with ChatGPT, many other tech companies are working fast to deliver their AI software. These can be in the form of an LLM or large language model, which is what ChatGPT is. Or they can be software that utilizes AI for things like data analytics.
With AI software, the program aims to learn human functionalities and patterns over time to reduce redundancies and help make tasks more streamlined and efficient.
3. Cloud Computing
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List of the Best AI Stocks
It would be pretty easy to list all of the big tech companies here, but we’ve tried to accumulate picks from different sectors. Here are our picks for some of the best AI stocks.
1. NVIDIA (NASDAQ: NVDA)
It should come as no surprise that NVIDIA tops our list of AI stocks to buy. You can argue that gaining more than 214.0% in one year might make this stock overvalued.
To be truthful, NVIDIA is well overdue for a correction. But that does not mean it isn’t a great investment for the future, especially if you are bullish on AI.
Currently, NVIDIA is the global leader in designing AI chips. It is also one of the largest providers of data centers for which demand has skyrocketed since the release of generative AI. As of February 2024, NVIDIA has momentarily surpassed Amazon to be the fifth-largest company in the world by market cap.
We will likely see a return to the mean for NVIDIA’s stock price at some point, but it can still be on pace to be the world’s most valuable company. Don’t let a large valuation steer you away from a proven industry leader.
Nvidia ($NVDA) Stock Rover Research Report 3/24
2. Microsoft (NASDAQ: MSFT)
The world’s largest company by market cap was one of the first big tech firms to invest in the AI revolution fully. Microsoft turned heads when it committed to a $10 billion investment in OpenAI after it released ChatGPT.
The company looked to integrate the GPT software into many of its enterprise products including Microsoft Office and its Bing search engine.
Microsoft is also integrating AI into its Azure Cloud services product to allow developers to build custom AI tools. When a company like Microsoft invests heavily in something like AI investors should pay attention.
3. Amazon (NASDAQ: AMZN)
Yet another big tech company that has dove headfirst and immersed itself into the world of AI. Like Microsoft, Amazon’s AWS is a way for the company to provide AI tools directly to its developers and users.
But Amazon is also using AI for its retail customers as well. The company has integrated machine learning into its Alexa voice-activated technology and many Amazon Go cashierless stores.
Amazon also uses AI to help make its logistics and fulfillment centers more streamlined and efficient. With machine-learning algorithms in the Amazon marketplace and even robots stocking and sorting packages for delivery, Amazon’s entire eCommerce business is being run by AI. The company also made a massive investment in Anthropic AI, one of the major rivals to OpenAI.
4. Tesla (NASDAQ: TSLA)
Wait, Tesla? The electric vehicle maker? CEO Elon Musk has said for years that Tesla is more than just an automaker. Last year, Tesla revealed Optimus, otherwise known as the Tesla bot.
This humanoid robot is designed to take on redundant and menial tasks for humans. Musk estimates these bots will be ready to be sent out into the workforce by 2027 and cost less than $20,000.
5. Palantir (NYSE: PLTR)
Palantir is a company that designs and operates data analytics software for both enterprises and government agencies. It has a long-standing relationship with the US government and commercial companies like Ferrari, IBM, and Airbus.
The company uses its AIP or Artificial Intelligence Platform to help users make decisions and manage large data sets. Overall, Palantir’s software improves operational efficiencies and provides industry-leading insights by harnessing the power of AI and machine learning.
Airbnb ($ABNB) TipRanks Stock Forecast Report 3/24
Are AI Stocks in a Bubble?
It’s been one of the most asked questions on Wall Street this year: are AI stocks in a bubble? The answer to the question likely depends on if you are bullish or bearish on AI moving forward. Yes, stocks like NVIDIA have grown exponentially in a very short period. Does that mean it is a bubble? Not necessarily!
There are differences between the current AI frenzy and the dot-com bubble from 2000. First, the AI revolution is currently being led by the largest companies in the world. Names like Microsoft, NVIDIA, Amazon, and Alphabet lead the way. There aren’t a lot of “phony” internet companies like there were back in the dot-com bubble.
Next, there is a legitimate demand for AI products and services worldwide. You can be skeptical of AI but cannot deny the demand companies have for it. It is being integrated into nearly every facet of our lives, which means real sales growth for AI companies.
Finally, valuations are extended but not typically seen in a bubble. For example, most people believe NVIDIA is the stock in a bubble. It has a forward-looking PE ratio of about 35 and a 5-year expected PEG ratio of 0.71. These are fairly normal valuations for a high-growth company.
As mentioned, stocks like NVIDIA will eventually have a valuation reset. But that doesn’t mean they will crash back down to zero. The AI revolution has seemed like a frenzy, and some stocks act like it is. But so far, there doesn’t seem to be anything indicating that AI stocks are currently in a bubble.
Final Thoughts: AI Stocks
As with any industry, investing in AI ultimately depends on each investor’s risk tolerance and timeframe. AI stocks are likely a very good investment if you buy ten years out. There’s a high chance that many of these AI companies will continue to be the largest businesses over the next decade.
It’s always wise to think about an entry point in the short term. If you expect AI stocks to come back down to Earth, then wait for a price you feel comfortable buying at. As always, this is not meant to be financial advice but rather an introduction to AI investing and if it fits your investment strategy.
Frequently Asked Questions
Stocks like $NVDA, $ISRG, and $SYM are some of the best stocks to buy. As always, make sure to do your due diligence before buying anything.
Surprisingly or not surprisingly, Microsoft is currently the number one AI company. NIVIDA comes in at number 2.
