Generational wealth is a common objective of stock investors. With the market's ability to generate long-term returns, it's an excellent place to preserve and grow wealth that can eventually be passed down to the next generation.
Generating significant long-term returns may have become a bit easier in the past year with the rise of artificial intelligence (AI) and its potential to grow businesses. The benefit of AI-driven applications is spreading into many diverse industries and exciting investors to the possibilities it can create. As a result, many AI-related stocks saw their prices rise significantly, especially when news came out about advances being made possible by Open AI's ChatGPT.
Two AI-related stocks that got fresh attention are Alphabet (GOOGL +0.20%) (GOOG +0.27%) and Broadcom (AVGO +0.88%). Both of these stocks positioned themselves to drive wealth creation through the AI initiatives they are associated with. Let's take a closer look at what these two AI stocks are doing to build generational wealth for their investors.
1. Alphabet
Alphabet is a quintessential AI stock. Since declaring itself an "AI-first" company in 2016, it has integrated the technology into products ranging from YouTube to the cameras in its Pixel phone. The most profound AI-related efforts may come from Google DeepMind, the merger of Google Research and the AI research company DeepMind. Their efforts enhanced Google's search engine through its Search Generative Experience (SGE). It has also capitalized on the technology by developing and improving Bard, Alphabet's its alternative to ChatGPT.
Additionally, Alphabet uses AI to optimize ads. Although Alphabet has worked to diversify its revenue sources, advertising accounted for 78% of the company's revenue in Q2. That means AI technology is driving a critical part of Alphabet's business.
So far this year, Alphabet has generated $144 billion in revenue, 5% more than the same period last year. And even though it significantly increased research and development spending, it grew net income over that timeframe by 3% to $33 billion.
NASDAQ: GOOG
Key Data Points
Admittedly, the stock is not cheap at a 27 P/E ratio, especially with this year's growth. But with revenue rising 41% in 2021 and 10% in 2022, growth could return as AI boosts its advertising and cloud products. Finally, with $118 billion in liquidity and $39 billion in free cash flow generated so far this year, Alphabet can not only preserve generational wealth, but also grow it as conditions improve.
2. Broadcom
Broadcom's potential to thrive thanks to AI comes from how the technology is being used in both its semiconductor solutions and infrastructure software segments. Its chip segment works closely with clients to develop specialized semiconductors for their needs. This segment recently released Jericho3-AI, an accelerator chip that runs massive machine learning (ML) workloads. The company claims it will balance workloads and operate congestion-free as it enables high-performance AI.
Its infrastructure software segment also offers its AIOps solution. This applies automation and data science to deliver actionable insights powered by AI and ML. Additionally, Broadcom's AI should experience a considerable boost when the company completes its takeover of VMWare at the end of Octover 2023. VMWare provides cloud computing and virtualization software, positioning it to support the workloads that power AI and ML.
NASDAQ: AVGO
Key Data Points
Even without VMWare in the fold, Broadcom generated $18 billion in revenue in the first half of 2023, rising 12% from year-ago levels. With the company reducing the cost of revenue and keeping expense growth in check, the net income for the first six months of 2023 of $7.3 billion surged higher by 43%.
Broadcom's power to build generational wealth also comes from its dividend. The payout of $18.40 per year works out to a dividend yield of 2.2%, well above the S&P 500 average of 1.5%. Moreover, that payout cost Broadcom $3.8 billion so far this year. But with Broadcom generating $8.3 billion in free cash flow this year, it should be able to cover the payout costs and continue to raise the payout, which has risen at least once yearly since 2010.
Indeed, new investors will have to pay about 26 times its earnings to benefit from that income stream. But with this tech stock trading up 50% so far in 2023 and nearly 2,200% over the last 10 years, Broadcom has proven its ability to generate rising income and long-term wealth for its shareholders.
