The debut of OpenAI's ChatGPT toward the end of 2022 kicked off the current artificial intelligence (AI) frenzy. In the years that followed, it seemed as if any company that could reasonably tout its connection to the AI trend could see its share price skyrocket. Those days are coming to an end.
That may be hard to believe, given that the industry is forecast to soar in value from $255 billion in 2025 to $1.7 trillion by 2031. This kind of growth means investing in AI stocks is a good move. However, some sectors within the AI market are booming, while the long-term growth opportunities in others are murkier.
As a result, investors must be selective when choosing AI stocks. Let's dissect the artificial intelligence industry to help build an investment portfolio with the potential for solid returns over time.
Image source: Getty Images.
The compelling case for AI infrastructure stocks
One of the hottest AI areas right now is tech infrastructure. Jensen Huang, CEO of Nvidia (NVDA 1.53%), predicted this would be the case in 2024, stating, "Companies and countries are partnering with Nvidia to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center -- AI factories -- to produce a new commodity: artificial intelligence."
AI systems are powered by data centers, but older facilities are not designed to support the technology, especially as its sophistication increases, as illustrated by the rise of agentic AI. Consequently, new AI-optimized data centers are being built. To support AI's tremendous computational needs, some will be the size of cities.
Due to their size and complexity, these data centers require high-speed, reliable components, such as the products offered by Credo Technology Group (CRDO 3.83%) and Astera Labs (ALAB 3.76%). Hence, investing in businesses that support the buildout of AI factories is a great way to benefit from this growth.
Semiconductor chip designer Nvidia is among these, since its famed graphics processing units (GPUs) remain in high demand to provide processing power to AI systems. The company booked record revenue of $57 billion in its fiscal 2026 third quarter, which ended Oct. 26, an impressive 62% year-over-year increase.
Fortune Business Insights predicts that the AI infrastructure market will grow from $46 billion in 2024 to $356 billion by 2032, delivering a multiyear tailwind for businesses in the sector. This includes energy companies supplying power to massive AI data centers.
A good way to capitalize on such trends is through exchange-traded funds (ETFs). An example is the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID 1.55%), which holds in its portfolio companies engaged in the electrical grid and related areas, such as energy storage and management.
NASDAQ: NVDA
Key Data Points
Mixed results in the AI software sector
ETFs are an excellent way of diversifying your portfolio. This is a crucial safeguard against risk, particularly when it comes to software companies, since not all will see sustained business growth from AI. For software-focused organizations to achieve long-term AI success, their tech must be superior to what competitors offer and provide an economic moat.
For example, Palantir Technologies (PLTR +1.25%) delivers AI software to the U.S. government. So does BigBear.ai (BBAI 2.66%). Yet while Palantir's third-quarter government sales soared 52% year over year to $486 million, BigBear.ai's Q3 revenue fell 20% to $33.1 million, largely due to the Trump administration's spending cuts.
Palantir thrived thanks to its proprietary ontology, which enables its AI software to deliver real-world results. Palantir's business performance compared to BigBear.ai illustrates why not all AI software companies will be winners, especially as the technology evolves toward artificial general intelligence (AGI), a still-theoretical level beyond which AI systems would be able to reason as effectively as humans.
NASDAQ: PLTR
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Tech for the future of AI
According to OpenAI CFO Sarah Friar, AGI is "the point at which AI systems can take on the majority of the value-added human work in the world. And we're getting close to that being the case." To get to that level, more computing horsepower will be needed. That's why the next frontier for AI could rest in quantum computing companies.
Quantum computers tap the peculiar properties of quantum mechanics to process data in ways that are fundamentally different than how classical computers operate. As a result, they can, in principle, solve certain unusual types of extraordinarily complex calculations in minutes that would take today's supercomputers centuries to complete. This tech could provide the computational foundation required to support AGI, but the industry is still in its infancy and has major hurdles to overcome.
For instance, the qubits that lie at the heart of quantum computers are delicate, which makes the machines vastly more prone to errors than a traditional computer. The tasks of reducing the number of errors they produce and effectively recognizing and correcting those that occur are the chief challenges every player in the space faces. One of the leading contenders, IBM (IBM 0.57%), says that by 2029, it expects to deliver a fault-tolerant quantum computer -- in other words, one that has a low enough error rate and a robust enough error-corrrection capacity to be truly useful. The arrival of such machines would open a path to widespread adoption of the tech.
NYSE: IBM
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IBM's overall sales are doing well, growing 9% year over year to $16.3 billion in Q3. It has also increased its dividend annually for 30 consecutive years, making the stock a reliable source of passive income.
Nvidia is playing a role in this area of AI as well. The company's NVQLink platform acts as a bridge between quantum computers and classical supercomputers, which helps address challenges such as error correction. Given that its fingers are in many AI pies, Nvidia will be a key artificial intelligence stock to own in 2026 and beyond.
