These picks offer strong potential in the AI sector, making them a smart investment choice.
Artificial intelligence stocks have significantly boosted the bull market since late 2022, but they’ve also faced major losses during the recent market downturn.
Not all AI-driven companies will deliver enduring wealth. Some may decline over time. However, investing in top-tier companies with strong, sustainable competitive advantages should yield impressive returns. Purchasing these stocks during price dips, like those seen recently, can enhance your investment gains.
Here are three top artificial intelligence stocks to consider buying during the current market downturn.
- Amazon
Amazon (NASDAQ: AMZN) remains the top public cloud provider, a crucial element for AI training and development. Despite the rise of competitors like Microsoft (NASDAQ: MSFT), Amazon has retained its strong position. Its cloud division, Amazon Web Services, saw a 19% revenue increase in the latest quarter, reinforcing its leadership in the industry.
Amazon is far more than just a cloud computing giant; it is a powerhouse in e-commerce. Its Prime membership fuels a self-reinforcing cycle of online sales. As more customers join Prime, more merchants use Amazon’s fulfillment network to offer Prime shipping. This, in turn, boosts Amazon’s investment in logistics, enhancing shipping speeds and making Prime even more appealing. In the first half of the year, Amazon delivered over 5 billion items to customers’ doorsteps on the same day or the next.
Amazon is also the world’s third-largest digital advertising company, surpassing a $50 billion run rate in the second quarter with a 20% year-over-year growth. This high-margin revenue has become a key profit driver for Amazon, as its retail business operates on very thin margins.
Amazon follows a pattern of investing and scaling to maximize returns, consistently generating increasing free cash flow with each cycle. The latest cycle has yielded $53 billion in free cash flow over the past 12 months. Despite ongoing investments in AI, Amazon is expected to continue growing its cash flow, especially as it reduces spending on fulfillment centers. Currently, shares are trading close to a 10-year high in free cash flow yield, making them a compelling investment at this level.
2. Microsoft
Microsoft is the fastest-growing hyperscale cloud provider, but its Azure platform’s 29% growth last quarter fell short of Wall Street’s high expectations. This sell-off might present a good opportunity for long-term investors. Despite recent strong growth, Microsoft anticipates Azure revenue will accelerate in the latter half of the year.
Microsoft has been heavily investing in AI, including a $10 billion investment in OpenAI in early 2023. The company has also spent billions on expanding data centers and acquiring chips for its servers. While these capital expenditures are significant upfront, it takes time to deploy and fully utilize the new chips and servers for Azure. As additional capacity becomes available, Microsoft expects to meet the anticipated demand.
Microsoft has become a leading choice for AI-focused developers, and its AI services, branded as Copilot, are gaining significant traction. The customer base for Copilot grew 60% sequentially last quarter, and with over 400 million Office 365 users, there is substantial potential for further growth.
However, Microsoft stock is not considered cheap by valuation standards. Its enterprise value is over 10 times analysts’ sales estimates for the next year, and its forward P/E ratio of nearly 31 is well above both the S&P 500 average and its own historical valuation over the past 15 years. Nonetheless, Microsoft’s robust growth and future potential justify the higher valuation.
3. Adobe
Adobe (NASDAQ: ADBE) is renowned for its creative software suite, which includes essential tools like Photoshop, Illustrator, and Lightroom. Last year, the company launched new generative AI capabilities powered by its Firefly model. Trained on Adobe’s proprietary data, including its stock image library, Firefly offers features such as generative fill and generative expand in Photoshop, text-to-vector in Illustrator, and object removal in Lightroom.
Adobe’s new features have significantly boosted user acquisition and retention over the past year. The company has effectively converted free users of Adobe Express into paid subscribers and encouraged existing subscribers to pay more for expanded AI capabilities. This has led to a resurgence in its key metric, annualized recurring revenue (ARR), which surpassed analysts’ expectations last quarter with $487 million. Management has also provided optimistic guidance for the current quarter.
Adobe aims to replicate this success with its Document Cloud (Acrobat) and marketing platform. The introduction of new AI tools designed to automate tasks and generate content is expected to drive higher subscription rates and increased revenue per user in the future.
Although generative AI has led to the emergence of various new creative design tools, Adobe’s position as the industry standard provides a significant advantage through a strong network effect. Designers need to be proficient in Adobe’s software to remain competitive, and companies seeking design work require access to Adobe’s tools. This creates a reinforcing cycle that makes it challenging for competitors to displace Adobe.
Adobe shares are currently trading at an enterprise value-to-revenue ratio of approximately 11, which is below its 10-year average. Similarly, its forward P/E ratio of around 27 is lower than its historical average and looks very appealing given its growth potential. This makes Adobe a compelling stock to consider buying during a market sell-off.
Should you invest $1,000 in Amazon right now?
Before making your decision, consider this:
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