The invention of generative artificial intelligence has triggered an arms race. All over the world, companies are investing in AI capabilities that will improve productivity and customer experiences. How can investors benefit from the AI trend? Besides picks and shovel plays, companies using AI to empower users are AI stocks to buy and hold.
Currently, the apparent beneficiary of AI is Nvidia (NASDAQ:NVDA). The semiconductor giant has a near monopoly in AI chips. Its best-in-class GPUs are used for training large language models. As expected, its revenues have soared, with even the latest earnings guidance beating Wall Street consensus by a considerable margin.
Apart from Nvidia, there are other cheaper players. For instance, semiconductor companies Broadcom (NASDAQ:AVGO) and Marvel Technology (NASDAQ:MRVL) have thriving AI businesses. At the same time, other companies are leveraging the technology to offer customers more productive and automated applications.
The following companies are AI stocks to buy and hold. Technically, they are less extended than AI bellwether Nvidia. Also, the valuation is much more reasonable, offering downside protection in an economic slowdown.
Broadcom (AVGO)
On September 1, Broadcom (NASDAQ:AVGO) had a 5% pullback after reporting in-line third-quarter fiscal year 2023 earnings. The selloff presents a buying opportunity in one of the advantaged AI stocks to buy and hold.
As the results highlighted, revenues grew 5% year-over-year as strength in the networking for the generative AI segment accelerated. Broadcom is a major supplier to hyperscalers, providing custom AI compute engines. It is helping these companies build out their AI clusters in their data centers.
In the quarter, their generative AI business produced more than $1 billion in revenue. In contrast, the other semiconductor business was flat. The AI segment now represents over 11% of total revenue and accounted for all the growth in the infrastructure business in the quarter.
The prospects for growth are even stronger heading into the fourth quarter. In the earnings call, CEO Hock Tan stated, “…we expect our networking revenue to accelerate in excess of 20% year-on-year. And this has been driven by the strength obviously in generative AI where we forecast to grow about 50% sequentially.”
Indeed, over the next year, generative AI demand will drive Broadcom’s revenue growth. That’s why analysts remain bullish on the stock despite the selloff. Several analysts raised their price targets, pointing out the growth from AI opportunities.
Moreover, the undemanding valuation makes it one of the AI stocks to buy and hold. AVGO stock trades at a forward price-to-earnings of 20, offering a favorable risk-reward ratio.
Salesforce (CRM)
Although it’s not a pick and shovels play, Salesforce (NYSE:CRM) is leveraging AI to empower its customers. In other words, the company is integrating AI technology into its applications to improve productivity. As these advantages appear, Salesforce can charge more for its products, accelerating revenue growth.
The company is leading the AI charge, as CEO Marc Benioff highlighted in the second quarter earnings release. “As the #1 AI CRM, with industry-leading clouds, Einstein, Data Cloud, MuleSoft, Slack, and Tableau, all integrated on one trusted, unified platform, we’re leading our customers into the new AI era.”
Salespeople use the company’s cloud software to originate prospects, track customer communications, and close deals. By integrating AI, which can produce insights from enterprise data, salespeople can be more productive. Its AI-powered CRM can auto-generate sales tasks, personalized content for customers, and customer insights.
In terms of fundamentals, Salesforce is a turnaround story getting back on track. The days of profligate spending are long gone, and the company is focused on profitability. Since last year, it has made significant progress. For example, in the second quarter, GAAP operating margins were 17.2% compared to 2.5% in the previous year’s quarter.
Also, the company raised guidance expecting 11% YOY revenue growth and Non-GAAP Diluted EPS of $8.04 – $8.06 for FY2023. Due to the positive outlook, analysts think it’s one of the top AI stocks to buy and hold. After earnings, J.P. Morgan’s Mark Murphy raised his price target to $240 from $230, citing improving margins and free cash flow.
Adobe (ADBE)
Like Salesforce, Adobe (NASDAQ:ADBE) is another company empowering its users by integrating AI into its applications. Initially, there were fears that AI would disrupt Adobe’s design software. But the company has responded decisively, making it one of the top AI stocks to buy and hold.
In March, the company launched Firefly, its range of creative Generative AI models trained on unique data sets. The service enables customers to use word prompts to generate images, audio, videos, and vectors. Firefly simplifies the content creation process and enhances the speed of creatives.
Firefly is now integrated into Adobe Express, making editing PDFs, touching up images, and creating immersive videos more straightforward and faster. It is already gaining traction and is available in over 100 languages. Since launching in March, users have generated over one billion images.
Bank of America analyst Brad Sill recently upgraded the stock to “buy.” Also, he raised the price target to $630 from $575. In the note, he opined that Adobe was a leader that would continue gaining share in the creative software category.
Additionally, he noted that Adobe would have incremental growth from AI in the coming year. With Firefly integrated into Adobe’s key products – Photoshop, Express, and Illustrator – the company is set for more growth.
And the growth comes at a reasonable valuation. Adobe is a profit machine with gross profit margins above 85% and free cash flow margins above 30%. Considering the best-in-class profitability and AI-powered growth, it should be one of the AI stocks to buy and hold for long-term gains.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
