Investing in artificial intelligence (AI) seems to have become more challenging over the last few months. More than one year after generative AI stoked excitement for tech investors, specific stocks such as Nvidia, Super Micro, and CrowdStrike seem to have drawn most of the interest and have risen to nosebleed valuations.
Fortunately for investors who feel they missed out on these stocks, AI will likely be more than a flash in the pan. Thus, one can buy and hold specific AI stocks for the next decade with a reasonable expectation of earning significant returns. These three stocks should deliver for investors.
NASDAQ: PLTR
Key Data Points
1. Palantir Technologies
At first glance, investors might assume they've missed out on Palantir Technologies (PLTR 1.87%). The stock is up fourfold since its low in late 2022. Also, the recent revenue growth is unlikely to impress growth investors.
Nonetheless, investors may have yet to fully realize the game-changing potential of its generative AI product: the Artificial Intelligence Platform (AIP). AIP builds on the analysis capabilities of its older Gotham and Foundry platforms. While those platforms also relied on AI, the productivity gains reported by AIP users have yielded eye-popping results.
After attending AIP boot camps, companies seem to find multiple use cases. One prospective customer accomplished more in a day through AIP than a hyperscaler (like Amazon Web Services) might have achieved in four months, while another claimed to build 10 times faster with three times fewer resources. Such results seem to quickly lead to new seven-figure deals for Palantir.
As mentioned, results may take time. In the first quarter of 2024, revenue of $634 million rose 21%, which appears modest when comparing growth to its price-to-sales (P/S) ratio of 24.
Still, its net income of $106 million is up more than sixfold from year-ago levels. If revenue growth starts to reflect the productivity gains and increased deal volumes driven by AIP, the stock price growth should accelerate significantly over the next few years.
NASDAQ: GOOGL
Key Data Points
2. Alphabet
In addition to up-and-coming AI companies, investors may also want to look at one of the pioneers in this field: Google parent Alphabet (GOOGL 0.41%) (GOOG 0.21%). Alphabet began using the technology in 2001 and became an AI-first company in 2016, employing the technology in all subsequent product releases.
However, the rise of ChatGPT left investors with the impression that Alphabet had fallen behind its peers. For the first time in decades, Google's dominant search engine faced a credible competitive threat.
Nonetheless, before writing off Alphabet, investors should remember that it has released its own generative AI tool in the form of Google Gemini. Moreover, Google Cloud, which is the third-largest cloud company, ensures it will play a critical role in deploying this technology for clients.
Furthermore, Alphabet combined its research teams in April 2023 to form Google DeepMind. With $108 billion in liquidity backing its efforts, Alphabet is unlikely to stay behind in this field.
Finally, at a price-to-earnings ratio of 28, it is cheaper than its mega-tech competitors. Between its breadth of experience in AI and its tremendous resource base, the Google parent will likely remain a force in the AI industry for a long time to come.
3. VanEck Semiconductor ETF
Investors who prefer not to risk precious capital on the fortunes of a particular company may simply want to invest in most of the top chip stocks through the VanEck Semiconductor ETF (SMH +1.53%). Most of the companies within the exchange-traded fund (ETF) either design or manufacture AI-ready chips. Without this technology, AI would not have been possible.
This ETF invests around 20% of its assets in Nvidia, with an additional 13% in the leading chip manufacturer Taiwan Semiconductor Manufacturing. The rest of its holdings make up less than 10% of the fund each, though Broadcom, Advanced Micro Devices, and Micron are among the 26 stocks held.
NASDAQ: SMH
Key Data Points
Moreover, it reported returns of 28% per year over the last 10 years. In comparison, the benchmark SPDR S&P 500 reported an average yearly return of 13% over the same period -- less than half the return of the VanEck ETF.
Furthermore, VanEck's ETF expense ratio is 0.35%, slightly below the average expense ratio, which is 0.37%, according to Morningstar. Thus, the fund has delivered these outsized returns at an affordable price.
Indeed, the fund does not guarantee it can match the 28% average annual return over the last 10 years. However, if one wants outsized returns with lower risk and without the work involved in finding such stocks, they will likely find both in the VanEck Semiconductor ETF.
