By far the biggest driving force behind the stock market returns over the last two years has been artificial intelligence (AI). With big tech spending heavily to build out data centers and develop new AI capabilities, the promises of AI are moving closer to a reality. Generative AI could increase worker productivity, reduce operational costs, and open new revenue streams for businesses.
But there could be a lot more growth yet to come. The excitement and potential for growth from AI sent many stocks soaring higher. While many companies already have high expectations baked into their stock prices, these three AI stocks offer a chance to buy great companies at a fair price (or better). And it doesn't take much to get started. With just $500, these are some of the most appealing AI stocks you could buy in the market right now.
Image source: Getty Images.
1. Palo Alto Networks
There are two big factors driving demand for Palo Alto Networks' (PANW +0.53%) cybersecurity services. First, as more companies shift their systems from on-premise computers to a hybrid of on-premise and cloud computing, they increase the number of potential vulnerabilities in their system. Second, with many workplaces adopting remote work, at least part time, there are more potential security breaches there as well.
A key factor in identifying and stopping cybersecurity threats is a strong artificial intelligence model. Palo Alto uses machine learning to ingest all the relevant data across multiple security tools and make a decision to protect the system without causing undue downtime for its customers. As a leading provider in the space, Palo Alto has a massive advantage over the competition: It has more data.
That advantage allows it to create better tools for detecting and mitigating attacks. That, in turn, makes its solutions more attractive to customers, who start using more Palo Alto services, giving it more data to work with, further improving its AI. The virtuous cycle should ensure Palo Alto remains a leader in the space for a long time.
NASDAQ: PANW
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Palo Alto is shifting more customers to software solutions, which have a positive impact on its gross margin as it continues to scale the business. Gross margin improved from 72% in fiscal 2023 to 74% last year. Despite the already substantial profitability of Palo Alto's sales, it could continue to expand that margin over the next few years.
Palo Alto shares trade for an enterprise value-to-revenue multiple of 13.6 as of this writing. That's a fair price to pay for the company that's growing its top line at a double-digit rate with expanding profitability. At its current stock price, investors could buy a couple shares of this leading cybersecurity AI company with $500.
2. Adobe
Adobe (ADBE 1.49%) positioned itself as a leader in commercial-safe generative AI for images and video. Its Firefly AI model is trained on its library of stock images and video, separating it from other creative AI tools. Over the last couple years, Adobe has integrated AI-powered features into its creative suite and its document cloud software.
Last year, Adobe introduced GenStudio, which combines its creative and marketing software with its generative AI capabilities to help businesses develop new ad campaigns. The platform points to the unique position of Adobe, with its market-leading creative software and access to valuable data.
Many see the rise of artificial intelligence as a threat to Adobe because it opens the door for new competitors. New tools like Midjourney or Dall-E could be seen as a threat to Photoshop and other Adobe creative tools. In fact, AI may expand the total market by bringing more amateurs into the creative space where Adobe is still the industry standard. Adobe is leaning into that trend by offering Firefly features in its free Adobe Express package, which successfully expanded the top of its sales funnel.
NASDAQ: ADBE
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Meanwhile, few professional creatives are going to switch to another product. Designers are expected to be able to work with Adobe's creative software and may be provided files formatted for Adobe products. They need to ensure that their products are received as intended, so Adobe will remain essential software for anyone in the design industry. With the integration of new AI features, Adobe increased the price for most of its subscription software, and its customers were fine paying it.
Adobe stock trades for less than 22 times forward earnings as of this writing. With the potential to drive down costs for Firefly while steadily growing its top line, the company should be able to grow earnings at a pace that more than justifies that price. Investors with $500 could buy a full share of Adobe, and still have enough money left over for a month of its Creative Cloud software.
3. Salesforce
Salesforce (CRM +0.51%) offers a growing suite of enterprise software ranging from its flagship customer relationship management software to marketing automation, to data organization and analysis.
In 2023, management said 20% of its customers use four or more of its subscription offerings, accounting for 85% of the company's annualized recurring revenue. Management also found success with its land and expand strategy, where it brings in a customer for one service but grows the number of services over time. The longer a company works with Salesforce, the more services they use and the more revenue they bring in.
Growing adoption of Salesforce's offerings has another big advantage for the company. It has a ton of data about each of its enterprise customers. CEO Marc Benioff says that gives it a "unfair advantage" in developing its latest product, Agentforce. Agentforce provides the tools companies need to automate decisions and actions using artificial intelligence. Access to unique and relevant data is necessary for a business to trust AI enough for it to independently act on its behalf.
NYSE: CRM
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Many businesses are willing to try out what Salesforce has been working on. Management said it signed 200 deals in the first week of putting Agentforce into production. There are a lot more deals in the pipeline, too. The adoption of Agentforce could provide a strong source of revenue growth in and of itself, but it could also drive further adoption of other Salesforce products as well.
Salesforce stock isn't cheap. It trades for about 31 times analysts estimates for fiscal 2026 (ending next January) earnings. That's a fair price to pay for a business with a strong pipeline showing acceleration in remaining performance obligations. Management's focus on improved profitability should continue to show up in expanding margins, especially as the cost of artificial intelligence comes down. At its current price, investors should consider using some of their $500 to add Salesforce to their portfolio.
