Betting big on the next hot thing can sometimes burn investors. That can be true even when the next hot thing is as exciting and promising as artificial intelligence (AI).
Concerns about being burned might cause some investors to be leery of buying AI stocks. However, this fear could result in them missing out on huge long-term returns. Are there alternatives for investing in AI that aren't super risky? Absolutely. Here are two AI stocks that even risk-averse investors can buy without hesitation.
Image source: Getty Images.
Two AI titans
If bigger is better, you won't find many better AI stocks than Amazon (AMZN +3.64%) and Microsoft (MSFT +3.06%). Amazon ranks as the fourth-largest publicly traded company based on market cap, while Microsoft holds the No. 2 spot. And their AI credentials are impeccable.
Amazon Web Services (AWS) is the global leader in cloud services, with a market share of 29%. Microsoft Azure is in second place with a market share of 22%. Both cloud platforms continue to enjoy strong growth, thanks in large part to organizations rushing to build and deploy AI models in the cloud.
Amazon and Microsoft boast partnerships with other top AI companies as well. Both companies have teamed up with Nvidia. Microsoft's investments in ChatGPT creator OpenAI are paying off handsomely, and Amazon has invested $8 billion in Anthropic, the developer of the powerful Claude large language model (LLM).
These two AI titans are also benefiting from AI in their internal operations. Amazon is using AI to recommend products to customers on its e-commerce platform, for example, while Microsoft has rolled out OpenAI's GPT-4 throughout its product lineup.
NASDAQ: AMZN
Key Data Points
Why risk-averse investors should like Amazon and Microsoft
Risk-averse investors know what they're getting with Amazon and Microsoft. Both companies are AI leaders, but they're also much more.
Amazon and Microsoft offer tremendous financial stability. Amazon generated revenue of nearly $638 billion last year, with profits totaling over $59 billion. Microsoft's revenue topped $245 billion, with earnings of more than $88 billion.
Each of the companies has a boatload of cash -- $94.6 billion for Amazon and $79.6 billion for Microsoft.
We've already seen that Amazon and Microsoft dominate the cloud services market. These two companies are also leaders in other areas. Amazon reigns as the 800-pound gorilla of e-commerce with a market share of 37.6%. Microsoft's Windows commands a 70% market share among desktop operating systems. The company's Office 365 suite ranks No. 2 in the productivity software market.
Both companies continue to deliver solid growth. Amazon's revenue increased 9% year over year in its latest quarter, with earnings soaring 64%. Microsoft's revenue jumped 13% year over year, with profits up 18%.
More importantly, both Amazon and Microsoft have strong growth prospects. Each company is poised to benefit from the ongoing AI tailwind and the shift from on-premises IT to the cloud. Amazon's e-commerce platform and Microsoft's software products also have solid growth potential.
NASDAQ: MSFT
Key Data Points
Not risk-free
I don't want to leave the impression that Amazon and Microsoft don't have any risks, though. There's no such thing as a risk-free stock.
Both Amazon and Microsoft face significant competition despite their current market dominance, and growth could be derailed by regulators in the U.S. and in Europe. Both stocks also trade at high valuations: Amazon's forward price-to-earnings ratio is 34.6, while Microsoft's forward earnings multiple is 33.2. These valuations make them more exposed if they experience a significant business disruption.
However, longtime investors know that the best stocks often command premium valuations. Amazon and Microsoft are two of the best stocks, with lifetime gains of around 227,800% and 123,200%, respectively.
Although Amazon and Microsoft face some risks, I think the pros of both stocks far outweigh the cons. If you're a risk-averse investor who wants to profit from the AI boom, I can't think of two better picks.
