Artificial intelligence (AI) stocks have been the hottest topic on Wall Street for the past three years. Part of that discussion is driven by investor excitement at a transformative technology and the desire to be part of it. Lately, alongside that excitement is the fear that AI stocks might be in a bubble, and what that could mean for the AI stocks everyone is piling into.
Fortunately, there are great businesses in the AI space that have been fantastic long-term holdings before AI became the biggest thing in markets, and should continue to be worth holding when, or if, the AI bubble bursts. Let's dig in and see why splitting $3,000 evenly into investments in these three stocks could end up being a smart move over the long term.
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1. ASML
You can't have artificial intelligence without semiconductors, and you can't have semiconductors without ASML (ASML 0.83%). This Dutch company makes the extremely complex machines that make the chips. Specifically, ASML manufactures the lithography machines that are a vital part of the chip manufacturing process. When it comes to the most high-end chips, such as those used in AI data centers, ASML is the only company in the world that manufactures the extreme ultraviolet (EUV) machines needed for the most advanced chips.
NASDAQ: ASML
Key Data Points
Year to date, ASML stock is handily beating the S&P 500 by posting 62% growth against the index's 16.4% rise. This result is typical for ASML over most periods. However, in 2024, ASML lagged the overall market's performance by more than 30 percentage points. This is because while most people were distracted by AI talk, the rest of the semiconductor industry was struggling through a cyclical downturn.
It is essential for investors to be aware of this. The semiconductor industry is cyclical, so companies like ASML will typically experience poor results during these downturns. However, the company's vital role in the semiconductor value chain positions it well for outperformance over longer periods of time.
2. Alphabet
When OpenAI's ChatGPT was released in late 2022, it started an arms race among several companies with competing large language models (LLMs). Opinions have varied at different times about who was leading in this competition, but one of the storylines was that Alphabet's (GOOG +0.83%) (GOOGL +0.81%) Gemini LLM was lagging, and investors worried that the tech giant might have lost its AI leadership.
NASDAQ: GOOG
Key Data Points
With the recent release of Gemini 3.0, it's safe to say that the rumors of Alphabet's death were greatly exaggerated. However, it's not the Gemini chatbot that makes Alphabet such a compelling AI stock to buy and hold; it's the rest of its business.
All the talk now is about who has the best LLM, but eventually, these companies will need to find a way to monetize the significant investment they're making in building their AI models. Considering its significant reach into many of our lives, it's easy to see why Alphabet is competitively advantaged. Between products like Gmail, Google Maps, YouTube, and Google Search, Alphabet has enormous amounts of customer data and is deeply integrated into many aspects of its customers' lives. Once users of Alphabet's products see the benefits of AI, an eventual monthly fee might feel like table stakes in an AI-dominated future.
3. Nvidia
If AI spending slows and the exuberance subsides, it stands to reason that Nvidia (NVDA 0.89%) would see its stock price fall. However, that's not the only thing going for the largest company in the world. Nvidia's results for the last few years have been dominated by its data center segment, where the AI chips are sold. However, Nvidia is a well-diversified business that supplies chips to a variety of industries.
NASDAQ: NVDA
Key Data Points
In its most recently reported quarter, the AI-driven data center segment saw its revenue increase by 66% year over year to a record $51 billion. However, the company's other segments also posted impressive results. The gaming, automotive, and professional visualization segments grew by 30%, 32%, and 56%, respectively.
It's worth noting that these segments combined don't come close to the revenue of the data center segment, but it demonstrates that Nvidia produces chips with a wide range of applications beyond just AI data centers. Over the long term, the world will need Nvidia's chips. AI is driving the business right now, and perhaps for longer than skeptics think, but there's more to the business than what gets talked about in the stock market headlines.
