There's no getting around it: Artificial intelligence (AI) has become part of the public conversation in recent months. The latest innovations in generative AI and large language models (LLMs) helped OpenAI's ChatGPT -- a next-generation chatbot -- go viral late last year. Since then, every technology company worth its salt has been jumping on the AI bandwagon for fear of being left behind.
Fueling this trend is the potential for dramatic productivity gains. Cathie Wood's Ark Investment Management has put pen to paper and estimates that AI could increase the productivity of knowledge workers more than fourfold by 2030. Furthermore, the resulting AI software could generate up to $14 trillion in additional revenue over the same period.
This leaves many investors with a conundrum. With all the companies piling into AI, it can be challenging to separate the wheat from the chaff. However, investors can benefit from the AI boom without taking on too much risk by focusing on companies with industry-leading positions, a history of solid results, and robust prospects. Let's look at three companies that fit the bill.
Image source: Getty Images.
Low-risk buy No. 1: Microsoft
Microsoft (MSFT 0.41%) shoulders at least part of the blame for the recent fervor surrounding AI. The company's $13 billion investment in ChatGPT was an opening salvo in the AI arms race to come.
Now, just months later, Microsoft has launched a number of AI-fueled tools that are integrated with its industry-leading software-as-a-service (SaaS) offerings and its "big three" cloud infrastructure business. The company recently announced the pricing for these productivity tools, which Wedbush analyst Dan Ives believes will increase its cloud revenue by 20% annually by 2025.
Yet even without the benefits of AI, Microsoft was already a compelling value proposition. In the middle of the worst downturn in over a decade, the company grew revenue by double digits with only a slight decline in net income.
Helping lead the charge was Azure, the company's cloud computing service. In the first quarter, Microsoft maintained its position as the world's second largest cloud infrastructure provider, with a 23% market share and growth of 27% year over year, according to technology market analysis firm Canalys.
At 10 times next year's sales, the stock isn't exactly cheap, but consider this: Microsoft stock has already gained 50% so far this year, and analysts' consensus estimates are calling for mid-single-digit growth this year, returning to double-digit growth in 2024 -- and that doesn't include any boost to Microsoft's growth as the result of its recent foray into AI.
It's also worth mentioning that Microsoft has a long track record of performance. Over the past decade, the company grew revenue by 185% while its net income climbed 249%. That fueled a 907% stock increase.
When taken together, it doesn't get much lower risk than that.
Low-risk buy No. 2: Alphabet
While the company hasn't gotten a lot of respect from investors lately, Alphabet (GOOG -1.74%) (GOOGL -1.51%) is another low-risk way to play the AI boom.
In mid-May, Alphabet released its response to the accelerating demand for AI, and investors liked what they saw. Google launched the next generation of its Pathways Language Model (PaLM) LLM, which laid the foundation for Google's Bard chatbot. Furthermore, the company detailed how it has infused AI functionality across many of its products and services.
Beyond AI, Alphabet's business pedigree is unmatched. Google search has ruled search for years, lately controlling roughly 93% of the market. Its search dominance fuels Alphabet's most lucrative business -- digital advertising. Google is the ad tech leader, commanding about 30% of the worldwide digital advertising market. As the economic storm clouds continue to clear, the flow of marketing dollars will increase, as will Alphabet's results.
Let's not forget the company's cloud computing business -- Google Cloud. It's the world's third-largest cloud infrastructure provider but the fastest growing of the big three. It controls just 9% of the market but grew revenue by 30% in the first quarter, outpacing its cloud rivals.
At less than 5 times next year's sales, the stock isn't the screaming bargain it was just a few months ago, but it's historically cheap nonetheless. Furthermore, Alphabet stock gained 40% through the first half of 2023, but there could be much more to come. Analysts' consensus estimates are forecasting mid-single-digit revenue growth this year, returning to double digits in 2024, and Wall Street isn't yet factoring in any gains from AI.
While historical performance isn't any guarantee of future results, it can be instructional -- and Alphabet has a long and distinguished track record. Over the past decade, the company grew revenue and net income by 407%, driving a 439% stock increase.
Low-risk buy No. 3: Amazon
We haven't heard much in the way of groundbreaking AI announcements from e-commerce pioneer Amazon (AMZN -0.94%), but that doesn't mean they aren't on the way, as the company has been at the forefront of AI for nearly two decades. In a recent interview, CEO Andy Jassy calls the recent advances "one of the biggest technical transformations of our lifetimes" and notes that "every single business unit inside of Amazon is working intensely and very broadly on generative AI."
A look back shows the depth of the company's expertise in AI. Amazon has deployed AI algorithms across its vast business domain since the beginning. The product recommendations made to its digital retail customers are distilled from a treasure trove of customer buying patterns. As Amazon's AI models improve, so, too, do its conversion rates. The company also uses AI to surface the most relevant products, stock its warehouses with the most-requested items, and control its vast shipping empire. It uses similar AI systems to recommend viewing choices on Prime video.
Yet beyond the AI connection, Amazon stock remains a compelling opportunity. While estimates vary, Amazon controls roughly 38% of the e-commerce market in the U.S., more than its next 14 rivals combined. Economic uncertainty and high inflation have weighed on consumer spending, but this, too, shall pass.
There's also Amazon Web Services, the company's cloud business. The digital transformation is ongoing, with more and more businesses moving to the cloud. This increases the overall cloud infrastructure market, and as the leading provider, Amazon is positioned to reap its share of the rewards.
Amazon's stock is rarely cheap, but at less than 3 times next year's sales, it's far from expensive. The e-commerce pioneer is expected to generate high-single-digit revenue growth this year, returning to double-digit growth in 2024. Yet a look at its history paints a compelling picture. Over the past 10 years, Amazon's revenue surged 645%, driving its net income 1,220% higher, resulting in stock gains of 761%.
This industry leader gives investors plenty of exposure to AI without much of the risk.
