There is one constant on Wall Street and that is finding the trendy new thing to hop aboard. This year it is artificial intelligence (AI stocks to buy.), or replacing human involvement with smart machines, systems and processes. This is inspiring investors to seek out
The capabilities of machine learning were revealed with the release of OpenAI‘s ChatGPT software. That spawned numerous other generative AI technologies that forever altered how we work, play, and interact with the world around us. Now that AI has been released, there is no putting the toothpaste back in the tube.
However, among the early winners in this nascent, transformative industry is Nvidia (NASDAQ:NVDA). Its advanced chips were perfectly positioned to capitalize on the need for the complex computing power required of AI technology. Yet after the stock tripled in 2023, it’s hard to argue Nvidia is still a good value at this level. A lot of its potential is already priced into the stock.
That’s okay because there are other opportunities out there that are not so rich. What follows are three top AI stocks to buy now that still promise substantial growth.
On the surface, Adobe (NASDAQ:ADBE) doesn’t look much better than Nvidia. The stock is up 60% year to date, it trades at 48 times earnings, 13 times sales and 32 times the free cash flow it generates. These hardly seem bargain-basement valuations. Yet this is only the beginning for the digital media company.
Despite AI potentially undermining Adobe’s suite of creativity and productivity tools, Adobe early on chose to embrace the technology. In 2016 it introduced Sensei, a unified framework for delivering AI services across its products. Earlier this year Adobe followed up with Firefly, a generative AI model that allows users to generate images and text only using text prompts. You type what you want and the model generates images based on your input.
Adobe is positioning them to capture large swaths of market share. It offers Firefly for free to all of its Creative Cloud users, giving them 25 generative credits per month. They can upgrade to 100 credits for just $4.99 per month. Considering how powerful the tools are, that’s a bargain. It’s also a price that can be increased down the road once a critical mass of users is created.
The digital media stock is hugely profitable and margins are growing. It’s valuation is based on its dominant position in the marketplace. It already offers industry-leading products that are getting juiced with AI capabilities. The resulting sales and profits expansion are worth the premium you’re paying for the stock. This one easily earns its spot on out list of AI stocks to buy.
Although I’m hesitant about recommending Chinese companies to investors because of growing geopolitical tensions, electric car maker Nio (NYSE:NIO) is one investors should consider. It is developing a portfolio of smart vehicles that blend the best of EV and autonomous vehicle capabilities.
Nio sales are growing. September deliveries jumped 44% year over year to 15,641 vehicles and saw a 75% increase in deliveries for the quarter. Since Nio cars started rolling off the assembly line, it has delivered almost 400,000 vehicles.
That pales in comparison to the 2 million EVs Tesla (NASDAQ:TSLA) has delivered, but Nio is young and expanding into Europe. Reuters reports it is considering using a dealership model there to complement its online and own-store network to boost sales.
Beyond EVs, Nio also has a chip business with its first implementation to be for autonomous vehicles (Nio is also developing a fully autonomous EV). The development of AVs will further boost Nios bona fides in the AI industry. It expects to mass produce the chips within one to two years.
Nio also builds its own batteries and offers a battery-swap service for Nio users. It plans on building a new plant in China to produce 40 gigawatt hours (GWh) of batteries, or enough to power 400,000 long-range EVs.
Nio’s stock is down 17% year to date and is about 50% below its 52-week high. Yet Nio remains one of the industry’s fastest growing manufacturers in China, the world’s largest market for EVs. With a wide-ranging reach, Nio’s stock represents a unique introduction to EVs that comes with an AI kicker.
And despite my reluctance regarding Chinese stocks, here’s a second one, Baidu (NASDAQ:BIDU). Best known as the Chinese equivalent of Alphabet‘s (NASDAQ:GOOG)(NASDAQ:GOOGL) Google, Baidu no longer sees itself as a search company, but rather an AI stock.
It recently released its version of ChatGPT called Ernie Bot and detailed its latest fourth generation generative AI model. The chatbot now has 45 million users. Unveiled at Baidu World 2023 in Beijing on Oct. 16, Baidu also showed how Ernie 4.0 could quickly create advertising posters and copy, along with marketing videos, all in a matter of minutes.
The Baidu app uses AI for medical instruction, offering comprehensive instructions, personalized advice from a digital doctor, and a summary image for efficient medication. While the thought of getting medical advice from AI may seem scary, people already self-diagnose by looking up symptoms on the internet. A “digital doctor,” however, may make the advice seem more authoritative than it really is. AI is not above making mistakes.
Baidu is further incorporating AI into its flagship products, such as search and maps. Its autonomous vehicle robotaxi service served some 4 million riders since launching last year.
Shares of the AI company are down 5% this year and off 32% from recent highs. However, trading at just 10 times next year’s earnings estimates, less than twice sales and a deeply discounted 11 times free cash flow, Baidu is cheap. There is risk due to global events, but this is an investment that will pay off handsomely throughout the long haul. If you are looking for AI stocks to buy, start here!
On the date of publication, Rich Duprey 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.