Artificial intelligence (AI) has been a hot investment theme over the last 12 months. Thanks to the success of AI-powered chatbot ChatGPT, investors have woken up to the power of this exciting technology. The good news is that it’s not too late to invest in artificial intelligence as the technology is still in its infancy. With that in mind, here are seven AI stocks that could be huge winners in the long run.
When it comes to AI stocks, it’s hard to look past Nvidia (NASDAQ:NVDA). A developer of ‘accelerated computing’ solutions, it is the biggest player in the AI chip market with a market share of around 80%.
You can think of Nvidia as a ‘pick-and-shovels’ play on AI. Today, its AI chips are used by a wide range of companies including Microsoft, Amazon, Meta Platforms, Google, and ChatGPT creator OpenAI (it’s rumoured that ChatGPT 4 required 50,000 Nvidia H100 chips). So, NVidia is one of the best AI stocks that should do well no matter who wins the artificial intelligence race.
It’s worth pointing out that Nvidia stock has had a big run recently. Last year, it rose around 240%. So, there is a chance of a pullback in the near term.
In the long run, however, the Nvidia share price should do well.
Currently, the forward-looking price-to-earnings (P/E) ratio here is only about 24 so the stock is not particularly expensive.
While Nvidia currently has the lion’s share of the AI chip market, other chip companies are launching their own products and capturing market share. One such company is another great AI stock, AMD (NASDAQ:AMD).
Recently, it launched the Instinct MI300X – a chip designed to compete with Nvidia’s H100 – and it is having success with this product. AMD CEO Lisa Su believes that the market for AI chips will amount to $400 billion or more by 2027 and she is hoping that her company will have a large part of the market.
AMD stock had a huge run late in 2023 and now looks a little expensive. Currently, the forward-looking P/E ratio is about 40.
Given the high valuation, I see AMD as an AI stock to buy on the dips.
If Lisa Su is right about the potential size of the AI chip market, one group of companies that is likely to do well is the semiconductor manufacturing equipment companies.
And one name here that’s worth highlighting is another of the best AI stocks, Lam Research (NASDAQ:LRCX). It specialises in equipment that helps chip manufacturing plants print layers of transistors in advanced chips.
Back in July, Lam raised its quarterly guidance thanks to AI-related demand. So, it appears to already be benefitting from the technology.
Lam Research shares currently trade on a P/E ratio of 28, using the earnings forecast for the year ending 30 June 2024. Using the following year’s earnings forecast, the P/E ratio falls to 22.
That’s a reasonable valuation, given the long-term growth potential of Lam Research.
Turning to software, Microsoft (NASDAQ:MSFT) is obviously going to be one of the best AI shares and looks set to be an AI winner.
It is a part owner of ChatGPT, having invested around $13 billion in OpenAI. And it has been incorporating generative AI technology across its Microsoft 365 product suite recently via its ‘Copilot’ AI assistant functionality. This leverages the power of large language models (LLMs) to help users be more productive and creative.
One thing Microsoft has going for it is a first-mover advantage. Because ChatGPT was the first major LLM to hit the market, it has become a verb. This doesn’t guarantee success, of course. But it does give the company an edge.
Now, Microsoft is a relatively expensive stock. Currently, it sports a forward-looking P/E ratio of about 33.
This is a high-quality company with a lot of growth potential, however. So, MSFT probably deserves a premium valuation.
While Microsoft might be winning the generative AI race right now due to its first-mover advantage, Google owner Alphabet (NASDAQ:GOOG) is working hard to catch up to its Big Tech rival.
In March 2023, it launched its conversational generative AI chatbot Bard. And then in December 2023, it launched Gemini – its rival to ChatGPT 4. This is the first model to outperform human experts on Massive Multitask Language Understanding (MMLU).
The risk here is that generative AI could disrupt Alphabet’s search business. I think this is baked into the company’s valuation, however, Currently, Alphabet trades on a P/E ratio of just 21. That’s a relatively low valuation given the company’s dominance and track record.
At that earnings multiple, the risk/reward skew makes the Alphabet share price attractive and one of the best AI stocks.
Microsoft and Alphabet aren’t the only Big Tech companies that are active in the AI space, however. Another company here that could be an AI winner is Amazon (NASDAQ:AMZN).
Amazon has been using artificial intelligence across its business for years now (personalising shopping experiences, automating warehouse processes, etc.). However, recently it has stepped up its AI game. For example, in November 2023, it announced the launch of Amazon Q. This is a generative AI-powered assistant designed specifically for businesses.
Amazon has a high valuation today. At present, the P/E ratio here is about 40.
I don’t see this earnings multiple as a deal breaker though. Amazon shares have always been expensive. Yet AMZN has still managed to deliver huge returns for investors over the long term.
It’s worth noting that Amazon owns the self-driving car company Zoox, and this has a lot of potential.
Finally, we have Apple (NASDAQ:AAPL).
Now, this company didn’t really get much attention on the artificial intelligence front in 2023. However, make no mistake, it’s going to be one of the best stocks in the AI space.
Recently, Apple has been spending millions of dollars per day in a quest to develop its own LLM, known as Ajax, as well as a chatbot, known internally as Apple GPT. The idea is that this technology could eventually be incorporated into its Siri voice assistant. Given Apple’s huge global user base, the company is uniquely positioned to implement – and monetise – generative AI in a mass-market consumer application.
Apple shares had a strong run in 2023. As a result, they now look a little expensive as the forward-looking P/E ratio is around 28.
Given the high valuation, I see Apple shares as another AI stock to buy on the dips.
Edward Sheldon has positions in Nvidia, Lam Research, Apple, Microsoft, Alphabet, and Amazon.