After nearly a year during which artificial intelligence (AI) stocks steadily booked significant increases, the segment began to cool off in March. The pullbacks of some of these stocks left investors questioning whether the AI rally had run its course, or whether what was occurring was a healthy short-term correction.
The answer to that question likely depends somewhat on the individual company. Nonetheless, the recent sell-offs were likely a short-term correction for many of these stocks. And with that in mind, we asked three Motley Fool analysts for ideas on which AI stocks are now better positioned to deliver outsized returns for investors.
Nvidia's healthy breather is a long-term buying opportunity
Justin Pope (Nvidia): Nvidia (NVDA +1.73%) is my pick for buying the dip. The stock has produced blistering gains over the past few years, but its acceleration to triple-digit percentage top- and bottom-line growth justified those gains. This uptick in Nvidia's business looks likely to last for some time.
NVDA Revenue (TTM) data by YCharts.
Nvidia is the dominant AI chip player today. The company's recipe for winning a large majority of that market has been a combination of cutting-edge chips and proprietary software that gets the most computing performance out of those chips. It's estimated that Nvidia now controls as much as 90% of the AI chip market.
The opportunity ahead of it is simple. AI is poised to become a massive market, and demand for computational capacity to support it could potentially lead to the data center footprint in America doubling by 2030, according to a report from Newmark. Even if competition eats into Nvidia's market share, Nvidia should benefit from the high demand that expansion will produce.
NASDAQ: NVDA
Key Data Points
On average, analysts are forecasting that Nvidia's earnings will grow at an annualized rate of 35% over the next three to five years. At today's share price, that outlook gives the stock a PEG ratio of just 1, which is a reasonable valuation.
Don't let short-term price fluctuations distract you from the high probability that Nvidia will likely be a more valuable stock five or 10 years from now. Look at the bigger picture, and Nvidia's value will become apparent.
Microsoft's early investments in artificial intelligence are starting to pay off
Jake Lerch (Microsoft): My choice is Microsoft (MSFT 1.33%). Thanks to its early forays into artificial intelligence, its competitive advantages are expanding. And after the stock's slight dip in recent weeks, the opportunity to buy into the world's largest company should not be overlooked.
NASDAQ: MSFT
Key Data Points
Take its position in the cloud computing market, for example. Microsoft Azure has long played second fiddle to Amazon Web Services (AWS). However, there are some indications this could be changing.
For one thing, Azure is growing faster than AWS. In the fourth quarter of 2023, Azure recorded 30% revenue growth while AWS grew by roughly 13%. Moreover, Microsoft has already integrated new AI tools into its offerings, including its Copilot suite, which includes many AI features for $30 a month. Amazon, on the other hand, has yet to meaningfully integrate AI features in AWS.
Unlike some other AI stocks, Microsoft's stock price is not solely dependent on how that niche fares. While the growth of AI will be a significant factor in its results, Microsoft's diverse businesses, spanning from gaming to advertising, reduce its risk as an investment.
Finally, the numbers don't lie. Microsoft is the world's largest company for a reason: Its management sets ambitious goals, and then achieves them. The company says it plans to grow its revenue to $500 billion by 2030 -- more than double its total over the last 12 months.
That's a bold target, but I have little doubt that CEO Satya Nadella can make it happen. After all, Microsoft's stock has returned an astounding 1,110% under his leadership. In short, Microsoft remains a great company -- one that investors should eagerly consider buying shares of on any dip.
This AI stock should again supercharge investor portfolios
Will Healy (Tesla): The stock I would buy on the dip is Tesla (TSLA +3.93%), as the negative sentiment around the stock has reached a fever pitch.
The electric vehicle (EV) company has lost close to half its value since last fall, and its market cap is down by more than 60% from its 2021 high. Slowing EV sales growth, a Cybertruck recall, and the uncertain future of Tesla's planned lower-cost vehicle have called into question many of the assumptions that once drove the stock higher.
NASDAQ: TSLA
Key Data Points
The company's first-quarter results seemed to reflect the negative sentiment -- revenue fell 9% year-over-year to $21 billion. Additionally, operating expenses rose, resulting in quarterly net income falling by 55% to $1.1 billion.
However, the saving grace for the company could be AI.
Tesla says it plans to unveil its robotaxi on Aug. 8, and investors have good reason to take it seriously. The company recently released an updated version of its full self-driving software and reduced the monthly cost of that feature from $200 to $99. These improvements could stoke optimism about the coming robotaxi.
Moreover, Cathie Wood and her team at Ark Invest have put a 2027 price target of $2,000 per share on the EV giant. That would be an approximate 12-fold gain from current levels.
Investors have good reason to take this call seriously. When Tesla was at a split-adjusted price of about $23 per share in 2018, Wood predicted it would rise to today's equivalent of $267 per share, a price it surpassed in 2021 before later pulling back.
Additionally, the stock staged a recovery on the news that it will begin production of a lower-cost vehicle in the second half of 2025. That increases the likelihood that Tesla has bottomed.
In the end, demand for lower-cost EVs and the larger number of potential customers for robotaxis could become long-term tailwinds for Tesla. That makes it more likely that another ambitious Ark Invest forecast for the stock will come true.
