Artificial intelligence (AI) has emerged as the bedrock of the Fourth Industrial Revolution. It is transforming industries like healthcare, finance, education, transportation, and entertainment. The best AI stocks are creating disruptive innovations, making them some of the most exciting investment opportunities.
Although AI is still in its infancy, it is redefining how we live and work. As businesses and consumers realize the immense benefits of AI integration, the best AI stocks have the potential for lucrative returns. According to McKinsey, over 40% of organizations plan to increase their investments in AI. As these plans take shape, AI providers are set for explosive growth.
Therefore, identifying the best AI stocks requires discernment. So, let’s explore three top AI stocks with strong fundamentals. More importantly, they have a clear vision of their artificial intelligence capabilities and are already generating revenues from the technology.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is experiencing significant revenue acceleration due to AI. Wall Street analysts estimate revenue growing 100% for this fiscal year and 46% in the next.
Despite the more than 170% year-to-date (YTD) gain, Nvidia remains a buy. Truly, Nvidia has a dominant position in AI and deep learning due to its high-performance graphics processing units (GPUs). In GPUs, the company enjoys over 80% market share, with competitors Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) fighting for scraps.
In addition, it’s developed a robust underlying ecosystem which includes software tools, libraries, and frameworks like CUDA and cuDNN. These platforms are widely used by AI developers and researchers, enhancing the network effects behind their AI chips.
Seeing tremendous growth, the company has now exceeded expectations and raised guidance by a wide margin for two consecutive quarters. In Q2 of 2023, revenue surged 101% year over year (YOY) and 88% quarter over quarter (QOQ).
Consequentially, earnings growth has been even more pronounced. Since Nvidia outsources chip manufacturing, it has significant operating leverage. Gross margins in Q2 of 2023 increased to 70.1%. That’s a significant improvement from 43.5% in the prior year quarter and 64.6% in Q1 of 2023.
Based on the expected earnings growth, analysts think it is one of the best AI stocks to own. On Oct. 2, Goldman added the stock to its conviction list. The analysts believe it’s the principal supplier to the AI gold rush, hence the $605 price target. Buy Nvidia for more than 40% upside from current levels as companies deploy complex AI models.
Microsoft (MSFT)
Recent fiscal Q1 2024 results showed Microsoft (NASDAQ:MSFT) is an AI beneficiary. It offers Azure AI, a comprehensive suite of AI tools and services, including machine learning services, cognitive services, and AI infrastructure.
As results showed, Azure is becoming the go-to ecosystem for AI development and deployment. On Oct. 24, management reported that Azure and other cloud services grew 29% YOY in Q1 2024. Indeed, that was an acceleration from the 26% growth rate in the previous quarter.
From the results, Microsoft clearly is gaining market share from other cloud service providers. For instance, Google Cloud reported a disappointing 22% revenue growth. Yet, Microsoft’s cloud services business is larger, generating over $23 billion in quarterly revenues compared to Google Cloud’s $8.4 billion.
Besides its intelligent cloud services, Microsoft has seamlessly integrated AI capabilities into its existing products, such as Microsoft Office and Windows. The firm has launched Copilot for its customers.
“With copilots, we are making the age of AI real for people and businesses everywhere,” said Satya Nadella, CEO of Microsoft.
Microsoft is enhancing all its products through AI. For instance, by integrating Copilot into GitHub, it has improved the productivity of developers by 55%. Over 1 million developers are paying to use GitHub Copilot.
Microsoft is integrating AI in every tech stack and every product to drive productivity. Buy before the Ignite Conference, where they will introduce more than 100 products and capabilities.
Adobe (ADBE)
Adobe (NASDAQ:ADBE) is known for its creative software products like Photoshop, Illustrator and Adobe Acrobat. Over the past year, it has incorporated AI and machine learning capabilities into its products and services.
Adobe is enhancing its creatives’ experience by integrating AI into its products. In March, it launched Adobe Firefly, which offers generative AI tools to create stunning text effects and high-quality images. Firefly supports over 100 languages and allows users to create content easily using text prompts.
And, by integrating Firefly into Photoshop and Illustrator, the company is already seeing enthusiasm from its customers. In the beta phase, ADBE has seen over three million downloads. Customers are using these game-changing capabilities in their workflows and have made over 2 billion generations.
Looking ahead, Adobe has a pipeline of innovations set to launch in the next few months. For instance, Fast Fill will enable creators to manipulate background elements and remove objects from videos easily. Other upcoming products include Stardust, Delight, and Scene Change.
Currently, TipRanks analysts see over 20% upside for Adobe. Therefore, buy one of the best free cash flow generating companies for the generative AI opportunity.
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.
