Investors will likely remember 2023 as the year artificial intelligence (AI) hit its stride. While tech giants have utilized the technology for years, investors turned back to these stocks when they saw the power of OpenAI's ChatGPT.
AI looks poised to advance the world's technology over the next 10 years and beyond. Many companies with footholds in the space should sustain their AI-inspired share price gains over the long term, and Nvidia (NVDA 6.18%), Palantir (PLTR 3.73%), and Alphabet (GOOGL 10.22%) (GOOG 9.96%) are three stocks in particular that should drive significant returns for investors.
If you've got $1,000 to invest, meaning you don't need it for bills in the short or medium term, you've paid off high-interest debt, and you've got your emergency fund set, consider investing in these three stocks.
Nvidia is the king of the AI hill
Jake Lerch (Nvidia): Let's face it: No company has benefited more from the AI revolution than Nvidia. Its shares are up an amazing 227% year to date. Taking a longer view, Nvidia's stock has skyrocketed over the last five years: A $10,000 investment made in late 2018 would be worth an eye-popping $120,000 today.
Nvidia makes the processors that power today's cutting-edge generative artificial intelligence applications. OpenAI's ChatGPT, Adobe's Firefly, and Microsoft's 365 Copilot, among many others, all rely on Nvidia chips.
What's more, there are far more AI applications on the way. During Nvidia's recent earnings call, Chief Financial Officer Colette Kress put it this way: "Most major consumer internet companies are racing to ramp up generative AI deployment. The enterprise wave of AI adoption is now beginning."
While tech titans like Meta Platforms, Alphabet, Microsoft, and Amazon are leading the way, AI has become crucial in a wide array of industries. Tesla needs AI to develop autonomous driving systems. Pharmaceutical companies hope AI will lead to breakthroughs in the treatment of disease. Companies like FedEx and UPS are implementing AI to optimize logistics.
You get the point -- AI will drive the next wave of innovation.
As a result, Wall Street expects a financial windfall for Nvidia. Its revenue and earnings forecasts have already skyrocketed, but they continue to rise as demand for the company's chips outpaces supply. Estimates for next fiscal year's revenue are through the roof. Analysts now expect the company to generate roughly $89 billion in sales. Nvidia generated less than $45 billion over the past 12 months.
NVDA Revenue Estimates for Next Fiscal Year data by YCharts.
The AI revolution is just getting started, and for investors looking for a way to participate in it for a decade or more, Nvidia is the stock to buy.
Palantir is proving its products' value
Justin Pope (Palantir Technologies): Investors have been interested in software company Palantir Technologies since it went public in late 2020. Part of Palantir's allure is due to its secretive work with U.S. government agencies and the military. But the company's progress in 2023 has gone a long way toward proving it deserves the hype.
For starters, Palantir is gaining traction in the private sector. Its software platforms, specifically Foundry, fuse data analytics and AI to identify trends and aid decision-making. That can translate to things like improved supply chain efficiency for manufacturers and better bank fraud detection. The use cases are seemingly endless.
Palantir's commercial customer count in the U.S. grew by 37% year-over-year in the third quarter, planting seeds for potentially robust long-term revenue growth. However, Palantir's contracts can span years, which means there can be lags between when a customer signs with Palantir and when it realizes meaningful billed revenue from the deal.
Momentum in its government segment has remained strong, too. Palantir recently won a five-year contract with the U.K.'s National Healthcare Service worth over $400 million. Deals like this show organizations are choosing Palantir to solve complex problems. Investors must continue watching the company's pipeline of customers, but there seems to be concrete demand for its services.
Financially, Palantir is rock-solid. It converts over 20% of revenue into free cash flow and is profitable on the basis of generally accepted accounting principles (GAAP). It has $3.2 billion in cash and equivalents on its balance sheet, and no debt. That's a war chest it can use to continue investing in growth or to make bolt-on acquisitions.
Palantir's future looks bright, making it a no-brainer stock to hold for at least the next decade.
Alphabet is big but has room to grow
Will Healy (Alphabet): Even though Google parent Alphabet made itself an "AI first" company seven years ago, many wondered whether it could match ChatGPT's capabilities when that application splashed on the scene. Also, with its market cap already at $1.7 trillion, one might wonder if its days of massive growth are over.
However, it is probably way too early to count out Alphabet. The company soon responded to ChatGPT by releasing Google Bard. Unlike ChatGPT, Bard can draw from Google's knowledge base to compose articles or code. It also takes from the company's extensive AI portfolio, which has driven every one of its products since its "AI first" declaration.
Moreover, with the emphasis on revenue coming from Google advertising and, lately, Google Cloud, investors could easily forget that Alphabet owns numerous other businesses, such as Verily Life Sciences and autonomous driving company Waymo.
Furthermore, it holds about $120 billion in cash and short-term investments that it can invest in all of these businesses. Additionally, in the first nine months of 2023, the company generated $62 billion in free cash flow. With that much money available to invest in AI, it is unlikely to remain behind for long.
Alphabet's share price has risen about 55% since the beginning of the year, taking its P/E ratio to about 26. While that valuation is well above the company's record low, the stock has often traded at significantly higher earnings multiples. Between its P/E ratio and its nearly unmatched ability to invest in its enterprises, Alphabet's AI prowess will likely keep making its shareholders wealthier.
