3 Top AI Stocks to Buy Right Now

Looking for a great way to invest in artificial intelligence? When scouring the market for great stocks, sometimes the best buy is one that's already in your portfolio. According to three Fool.com contributors, that's just the case with these three AI stocks: DigitalOcean (DOCN -0.27%), IBM (IBM -0.34%), and LendingClub (LC 1.12%). Here's why we'd buy each of these AI companies again in a heartbeat.

Making tech work for small businesses, too

Nicholas Rossolillo (DigitalOcean): I was first drawn to this stock because of its focus on small businesses and aspiring digital entrepreneurs. Cloud computing and all of its ancillary tech like AI (which is often handled at a remote data center and delivered via an internet connection) can be expensive to implement -- and tricky to figure out how to make work.

But DigitalOcean is trying to break down some of the barriers that have held many small businesses back from putting cutting-edge technology to work. In fact, this young company has over 602,000 customers in 185 countries, and it's still going strong. Its key to success? Making it affordable to build and launch a new digital product (as little as $5 a month), and making it easy to get started (code can be written and deployed in minutes).  

For those trying to get educated on cloud computing, DigitalOcean has an extensive library of online tutorials and blogs that can even be used by developers working on a different cloud service (since DigitalOcean is an open source platform). Included in its educational library: how to put AI and machine learning (a branch of AI in which a computing system learns from experience) to use.

I recently purchased shares, and I plan on buying again in the future. Small business spending on the cloud is growing at a double-digit rate, and DigitalOcean expects it can grow its sales at about a 30% clip this year and into 2022. It's also profitable, a rarity among small fast-growing firms like this. The stock is up 65% since its IPO this past spring. However, at 18 times expected current year sales, DigitalOcean still looks like a long-term value if it can maintain its momentum.

Image source: Getty Images.

IBM: Low prices, huge dividend yields, and a market-leading AI package

Anders Bylund (IBM): Good old International Business Machines is not just a respected name in the field of artificial intelligence but the clear-cut leader in this $156 billion market, according to IDC. Big Blue sowed the seeds to its Watson AI engine decades ago and has nurtured that asset into a problem-solving system with serious business chops.

The company's entire business model is now focused on Watson-powered artificial intelligence, delivered in a variety of hybrid cloud computing models.

"We fundamentally believe that core to the competitiveness of every company going forward will be their ability to use AI to unlock real-time value from their data wherever the data resides," IBM CEO Arvind Krishna said in a recent earnings call.

The long-term promise of IBM's artificial intelligence strategy is undeniable, but investors have lost patience with the company's long-running transformation process. As a result, you can pick up IBM shares on the cheap today at just 13 times free cash flow or 12 times forward earnings. Furthermore, the low stock price and the company's firm commitment to a strong dividend policy has boosted IBM's dividend yield to a generous 4.7%.

I've said it many times before and I'll gladly say it again: Big Blue is a great long-term investment at these modest prices, and I'm seriously thinking about adding a few more stubs to my own IBM holdings someday soon.

This AI-driven lender has tripled this year and still has room to run

Billy Duberstein (LendingClub): One of the biggest industries where AI is making an impact is in the world of fintech. It's a fairly broad, catch-all term, but AI and automation has become especially front and center in the world of loan underwriting. In just the past couple months, two new-age fintechs that each use big data and automation to underwrite personal loans have taken off: Upstart Holdings (UPST 0.22%) and LendingClub, up 57% and 93%, respectively, over the past three months.

Data by YCharts.

LendingClub and Upstart are similar in many ways. Both companies use big data and artificial intelligence to approve more loans while also offering lower rates than most credit card companies, which primarily use FICO scores. And both companies also use a marketplace model, whereby they resell their loans to partner banks and asset managers based on partner underwriting criteria.

While both companies are similar and each has a lot of promise, I'm going to go with LendingClub today. Why? Well, it largely comes down to a question of valuation and business model. After all, both LendingClub and Upstart had strikingly similar operating metrics last quarter, but their market valuations are very, very different:

Data source: Companies' Q2 2021 earnings results. Chart by author.

While LendingClub and Upstart have strikingly similar financials, Upstart trades at a market cap over six times that of LendingClub!

Not only that, but Upstart's higher profitability is also a bit misleading, due to a key business model difference. In February, LendingClub acquired Radius Bank, which gave LendingClub a banking license and allowed it to hold deposits. According to management, LendingClub will now be holding 15% to 25% of its loans on its own balance sheet going forward, unlike Upstart which is a "pure" marketplace as of now.

While LendingClub will receive more total profits over the life of the loans it holds on its balance sheet, it also has to deduct current expected credit losses (CECL) from new loans up front, which totaled $34.6 million last quarter. Add that back, and LendingClub would have actually been more profitable than Upstart.

Both companies are pioneering the exciting field of AI-driven loan underwriting, which is leading to impressive results; however, given that LendingClub is basically valued at one-sixth of Upstart, it's definitely the pick for me, even after its recent run.