Artificial intelligence (AI) is one of the market's hottest trends right now, and getting your portfolio aligned to take advantage of this trend for 2024 is paramount before 2023 arrives. While the market is full of exciting AI investments, there are three that I think stand out above the rest.
I've got my eye on Alphabet (GOOG 9.96%) (GOOGL 10.22%), UiPath (PATH 0.26%), and Microsoft (MSFT 1.82%), and I think these three will be big-time winners next year.
AI investments come in all shapes and sizes
Each of these companies is involved with AI in some facet, with some overlap between them.
Alphabet and Microsoft are the most alike, as their respective cloud computing offerings (Alphabet's Google Cloud and Microsoft's Azure) are vital in AI proliferation. Without their products, prospective clients who want to use AI to their advantage wouldn't have the computing power to develop the models or the storage space necessary to harness proprietary data. Cloud computing is a huge opportunity for both companies and is expected to expand from a $626 billion to a $1.27 trillion market opportunity by 2028.
Outside of that, Alphabet and Microsoft are competing against each other with their various generative AI products, as Alphabet has produced its own AI product, Bard, in-house. At the same time, Microsoft has partnered with OpenAI, the creators of ChatGPT. Even though both companies are competing, they are each slated to profit from the growing AI trend and make for a strong investment case.
UiPath isn't in either of these industries, but its robotic process automation (RPA) software is also slated to benefit from the AI trend. While RPA isn't necessarily AI-based, the software becomes much more powerful when paired with it.
RPA allows its users to automate repetitive tasks, and UiPath also harnesses the power of AI to make its software more intelligent. It can use information from communications and other data streams to fill out a document or monitor employees' tasks to pinpoint jobs that could be automated.
All three companies do much more with AI than just this, and they each represent strong AI investment cases. But why is now the right time to buy?
If these companies continue their momentum, 2024 will be a special year
All three stocks have had relatively strong 2023, with Alphabet and Microsoft rising around 50% and UiPath up around 80%. That may leave some people incorrectly believing these companies are set up for a weak 2024.
All three companies are currently hitting their stride, as their revenue growth is the highest it has been all year.
PATH Revenue (Quarterly YoY Growth) data by YCharts
The stock prices have responded as they have because each company is succeeding. Another question many savvy investors might have regards the valuation of each company.
Microsoft and Alphabet are fully profitable, whereas UiPath is not, so I'll use different metrics to compare valuations.
GOOGL PE Ratio (Forward) data by YCharts
Alphabet is a much cheaper stock than Microsoft, as it only trades at 23 times forward earnings, which is much lower than where it has traded from a historical trailing earnings perspective. This tells me that Alphabet stock isn't overvalued and is primed for a great 2024.
Microsoft is trading near the high end of its valuation range, but there have been very few times Microsoft has traded lower than 30 times earnings recently. As a result, you'll have to pay up a bit to own Microsoft, but with its top-notch execution, I think the premium is well worth paying.
UiPath spent most of 2023 trading below 10 times sales, but after a fantastic third-quarter earnings report, the stock skyrocketed, increasing its valuation a fair amount. However, 11 times sales isn't that expensive, especially compared to other rapidly growing AI companies.
PATH PS Ratio data by YCharts
All three stocks look like fantastic buys right now, and an investment now will likely make you look like a genius a couple of years from now.
