3 Innovative AI Stocks Primed for the Bull Market Ahead

As the economy steers back to greener pastures after a tumultuous 2022, investors look to peer through Wall Street's fog to spot golden opportunities shimmering in the distance. In particular, artificial intelligence (AI) stocks seem ready to skyrocket as the global economy normalizes.

So we asked a trio of Foolish tech experts to share their best AI picks at the threshold of August 2023. The dynamic AI trio they came up with -- Broadcom (AVGO 3.84%), Twilio (TWLO 1.47%), and Alphabet (GOOGL 10.22%) (GOOG 9.96%) -- is not just riding this technological wave. These companies are shaping it.

Let's take a deep dive into why these three stocks are primed to take center stage as the next bull market develops.

This dividend stock has tailwinds from AI and a pending acquisition

Billy Duberstein (Broadcom): Infrastructure and mobile chip giant Broadcom has already appreciated a lot in the wake of the AI hype. But it was a cheap stock, to begin with, its AI tailwinds are real, and its upcoming acquisition of VMware could fuel further upside.

Broadcom may look expensive at 28 times earnings, but its generally accepted accounting principles (GAAP) earnings numbers are depressed, thanks to a high amortization of intangible assets from past acquisitions. When looking at its second quarter earnings and free cash flow, the stock is not quite that pricey.

Non-GAAP earnings per share (EPS) was $10.32 last quarter, much higher than the $8.15 of GAAP EPS. If Broadcom can make around $45 in adjusted earnings this year, that would put the stock around 20 times earnings.

While not a large part of its current revenue, Broadcom does expect exploding growth from its AI-focused products, which management puts at around 15% of its semiconductor business today. The chip business itself makes up about 75% of revenue, with the remainder coming from infrastructure software. Yet, by the end of fiscal 2024, management sees AI revenue growing to 25% of chip revenue.

That portfolio consists of network switching technology needed to direct data through GPU (graphics processing units) filled data centers at incredibly fast speeds and where Broadcom's Jericho and Tomahawk families of switching chips have a strong leadership position.

Broadcom also has an application-specific integrated circuit (ASIC) platform that allows large cloud providers to design their own AI accelerators, with high-profile clients Meta Platforms, Microsoft, and Alphabet. In a blog post, Broadcom describes ASICs as helping customers design their own cars, but Broadcom supplies the brakes, seats, chassis, and other high-quality parts to make the design run smoothly. That business should see strong growth as well.

I'm also bullish on Broadcom's pending acquisition of VMware, which was just approved by the European Commission earlier this month. While there are more hurdles to overcome, management believes the deal will close this year. VMware is a software juggernaut that should benefit from the multi-cloud era. With all three major cloud providers investing in their own unique capabilities and enterprises likely not wanting to be "locked in" to any one vendor, most companies are bound to use a multi-cloud architecture.

VMware helps integrate multi-cloud into a single interface and, therefore, could become the user interface (UI) for running AI workloads across clouds. Moreover, the acquisition will make Broadcom more diversified, with 50% of revenue coming from chips and 50% from software once the deal closes. Since software companies tend to garner higher valuations than chip stocks, that could also boost Broadcom's stock price even further.

Cathie Wood agrees: Twilio is a great buy right now

Anders Bylund (Twilio): Cloud-based communications expert Twilio is not only a great AI innovator but also a solid stock pick in the summer of 2023. The company operates in the communication platform-as-a-service (CPaaS) market. This niche of the larger software-as-a-service (SaaS) sector is expected to nearly quadruple from $12.5 billion last year to $45.3 billion in 2027.

If all Twilio does is hang on to its existing market share during that run, it will pocket a compound average growth rate (CAGR) of nearly 30% over four years. That would be an impressive growth spurt.

But Twilio looks ready to do more than that. Its robust app development platform, used by hundreds of thousands of businesses and millions of developers worldwide, should help it grow market share in this vibrant industry.

Twilio's 2020 acquisition of Segment, a leading customer data platform, could also deliver strong growth in the $79 billion customer engagement market. This buyout will let Twilio provide more personalized experiences for its customers' customers, further bolstering its already impressive leadership.

And Twilio is getting it done with a generous dose of robotic brains. The company is integrating AI tools into its platform on many layers, which could help it kick down some fresh doors in the current AI-focused business environment. Furthermore, Twilio's unique collection of customer data, accumulated through years of serving world-class consumer businesses like Uber and Airbnb, should provide lots of analytic nutrition for the company's own machine learning projects.

And you get all of this at a very reasonable share price. Twilio's stock has taken a 30% price cut over the last year. It currently trades at the inviting valuation ratios of 2.8 times sales and 32 times forward earnings. Growth investing guru Cathie Wood is buying Twilio stock hand over fist -- and for good reason. You should consider following Wood's example and grab a few shares of this value-packed stock before the next bull market train takes off.

The tech giant that quietly pioneered the current AI hype

Nicholas Rossolillo (Alphabet): Sure, Nvidia is hogging the AI spotlight, but it's an underrated fact that Alphabet, best known for Google Search, did some pioneering work to make it all possible in the first place. Even Nvidia acknowledges that a 2017 Google whitepaper about transformers -- the algorithm architecture used to build generative AI services, including ChatGPT -- was a watershed moment for the now multi-decades-long AI development cycle.

Thanks to its research, Google is infusing all sorts of its services with AI. Many investors at first fretted that Microsoft's investment in ChatGPT creator OpenAI would make Microsoft's insignificant search engine Bing a real competitor to Google. So far, no such thing has happened, and Google is once again using AI to reimagine the organization of the internet's ocean of information using its own AI algorithms.

Other core properties, like YouTube, are also getting a boost from more helpful AI-powered user tools. During Q2 2023, advertising revenue from Search and YouTube increased 5% and 4% year over year, respectively, ending a several-quarter slump in Google's most important revenue generator.

Additionally, Google Cloud is going strong and getting even better with new infrastructure -- including lots of Nvidia AI chips -- to fuel innovative start-ups as they imagine new ways to put AI to use in the world. Google Cloud sales increased 28% year over year, representing just over 10% of total Alphabet revenue.

As the world emerges from its 2023 economic slump, Alphabet stock could still have much to gain. Shares trade for under 20 times Wall Street analysts' expected 2024 earnings, a reasonable price tag for a company expected to generate at least high-single-digit to low-teens percentage earnings growth for the foreseeable future.

Alphabet's incredibly deep pockets, $118 billion in cash and short-term investments, and debt of just $13.7 billion mean the company has plenty of money to return to shareholders in the coming decades via stock buybacks and, maybe, one day, a dividend. This tech giant is primed and ready for the next bull market.