Artificial intelligence (AI) captured the imagination of investors in 2023. This isn't surprising. Whenever there's a new technology, it's natural to see investors clamor to figure out who the winners will be. Now that consumer-facing products utilize generative AI models like ChatGPT and Bard, the race is on to see what stocks will be winners in this new world of AI.
But AI was around long before 2023 and many companies have been focusing on AI for years, making their use cases less unknown than some newer AI-focused start-ups. However, there are also many companies suddenly talking about AI when in reality it's not a material part of their business.
Let's take a look at three stocks with true long-term AI tailwinds that make them great stocks to buy and hold.
1. Nvidia
The conversation needs to start with chip designer Nvidia (NVDA 6.18%). The AI mania surrounding Nvidia began when the company reported its fiscal 2024 second-quarter earnings (ended July 30, 2023). Total revenue, which was expected to be $11 billion, came in at $14 billion. This represented a year-over-year increase of 101%. This surprise in total revenue was driven by data center revenue, which increased by 171%. The data center growth was a result of chips needed for large tech companies to power their generative AI efforts. The good news for Nvidia has continued from there.
Data source: Nvidia
This trend is expected to continue into the fourth quarter, with total revenue expected to increase by more than 200% year over year. As exciting as this has been for Nvidia shareholders, potential investors may want to exercise some patience. Nvidia stock is priced as if this growth will never slow. The stock trades for 66 times trailing earnings. There's a chance that the growth continues enough to make an investment today work out, but it may be prudent to wait a bit until the stock cools off a bit more.
This is a cyclical industry and it's likely better valuations will present themselves in the future. Even if the AI hype wears off, Nvidia has a diversified business and has seen massive success in other areas like gaming and automotive. This company is poised for success in the long run.
2. Microsoft
As mentioned earlier, the AI buzz started when ChatGPT was launched for consumers in November 2022. ChatGPT was developed by a private company called OpenAI, but tech giant Microsoft (MSFT 1.82%) is a significant investor in OpenAI. While the billions of dollars it provided to the company doesn't give Microsoft any ownership of OpenAI, it does smooth the way for ChatGPT to be integrated into Microsoft products. The first example of this is Microsoft's browser, Bing. However, the company plans to integrate generative AI into multiple products.
If the promise of AI pans out, this could be a significant development for a company like Microsoft, which has a massive market share with products like Microsoft Word and Excel. Adding AI to these products could make them more attractive and sticky for users. There's been an impact on Microsoft's Azure Cloud business as its customers increase demand for AI services.
Microsoft currently trades at a premium valuation of 36 times trailing earnings, above the market average and the company's historical multiple. That said, the company does seem to have a lead in the AI space so some premium is to be expected.
3. Alphabet
Not to be left out, Alphabet (GOOG 9.96%) (GOOGL 10.22%) has developed its own generative AI product, Bard. The parent company of Google is integrating Bard into several of its products like Gmail, YouTube, and Google Maps. If the promise of AI is to be believed, there is room for several winners in this space, and it's easy to imagine a world where Alphabet has AI fully integrated into its products. This could help the company maintain its dominant market position in the future.
Luckily for investors, there are plenty of things to like about Alphabet's businesses even without AI. Google is by far the leader in search while YouTube plays a dominant role in online. Its cloud infrastructure platform Google Cloud grew revenue by 22% in Q3 2024. These business segments have helped Alphabet's stock increase by 56% in 2023.
Even better for potential investors is the fact that Alphabet still trades for a reasonable valuation. The company's price-to-earnings multiple of 27 is only slightly above the S&P 500's multiple of 25 and still below Alphabet's historical average of 30.
