Last month, the writers at InvestorPlace.com and I recommended four stocks to buy for the coming “AI Wars.” Governments worldwide know that artificial intelligence has incredible potential, and everyone is racing to come out ahead.
The United Kingdom has promised to pour $1.3 billion over the next five years into AI and supercomputing, while China will put in double that amount. If you include government subsidies of chip factories (the most capital-intensive part of AI investment), roughly $120 billion has now been pledged.
We’re already seeing the effects of this new AI nationalism. Since January, shares of Palantir Technologies (NYSE:PLTR) — one of the four stocks we highlighted last week — have surged 45% on strong fourth-quarter earnings. The secretive company specializes in helping corporations and governments eke out AI-driven insights from mounds of data. Nvidia (NASDAQ:NVDA), one of Louis Navellier’s top picks, has risen 45% since the start of the year after tripling the prices of its AI-focused H100 flagship processors. U.K.-based AI chip designer Arm Holdings (NASDAQ:ARM) is up almost 60% after earnings… the list goes on.
In other words, these companies are raising prices and creating monopolies… and governments are happy to allow it.
Of course, some AI stocks will take time to play out. Last Friday, shares of Intel (NASDAQ:INTC) (another of our four picks from last week) fell 12% after the chipmaker announced a weaker-than-expected forecast. It will likely take one or two more years for Intel to see the benefits of the billion-dollar subsidies the U.S. government is providing.
Nevertheless, this much is clear: When governments and investors all want a sector to succeed, the combination of supporting tariffs, subsidies and lax regulation can often make it so. We’ve seen this before in other industries… from shale oil and gas drilling in the Dakotas to electric vehicle production in China’s Anhui province. Once a state begins putting its thumb on the scale, those favored industries have little choice but to succeed.
This week, Luke Lango reveals another group of stocks in The AI Endgame. During that event, Luke will tell us all about the final phase of the AI Revolution, which could send several unknown stocks soaring to new heights… while simultaneously erasing thousands of stocks from the markets. You can sign up to reserve your spot for that event — Tuesday, Feb. 13, at 8 p.m. Eastern — here.
And in the meantime, our writers here at InvestorPlace.com have chosen three blue-chip stocks to help keep you ahead as these AI Wars continue to escalate.
3 Blue Chip AI Stocks to Buy: Alphabet (GOOG, GOOGL)
Perhaps the clearest potential winner of AI nationalism will be Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the parent company of Google. The company launched its answer to OpenAI’s ChatGPT on Wednesday, and our initial tests suggest it’s even better than GPT-4.
This comes as much-needed good news for the search giant. Digital ad revenues have been slowing for years, and Google has become increasingly reliant on its cloud computing business for growth. A strong showing by its new AI product — Google Gemini — will help it push past rivals Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). It’s one of the reasons why David Moadel, one of InvestorPlace’s top contributors, believes that Alphabet is a Mag 7 bargain:
“There no denying that Alphabet is committed to developing the latest and greatest in AI tech… [and] agree with Truist Securities analyst Youssef Squali, who asserts that Alphabet “remains at the forefront of the AI race.” All three of the analysts mentioned here assigned a “buy” rating to GOOG/GOOGL stock.
“My forecast GOOG stock is 100% bullish and I encourage investors to grab some shares before the next long-term rally commences.”
AI nationalism is also particularly important for Alphabet because it has the most to gain from lax regulation. Google has the broadest access to online data of any major tech firm, having indexed the web for the past 25 years. Many publishers also give Google the ability to “crawl” content behind paywalled sites — a privilege that virtually no other firm has.
That makes Google the most likely company to beat ChatGPT — provided it can use the data it’s collected. Studies have shown that large language models (LLMs) continue improving as more training data is added. So, a hands-off approach by regulators will be essential to helping Google win.
Of course, other American blue-chips will also benefit from favorable regulation. Export restrictions to China will eventually turn into import restrictions, protecting companies like Nvidia from cheaper Chinese rivals. Microsoft and Amazon will both find themselves protected from trustbusters because regulators recognize that AI is only as good as the massive amounts of data it hoovers up.
But AI will benefit Google the most, given the company’s awkward reliance on a slowing search business and the amount of data it has. Alphabet is also the cheapest of the Magnificent 7 stocks, trading at only 21 times forward earnings. If the company manages to beat OpenAI, a renewed surge of growth gives the search giant a 50% to 60% upside from here.
2. ASML (ASML)
Last year was a tough time to own ASML (NASDAQ:ASML), the world’s only producer of advanced chipmaking machinery. The Netherlands-based company had found itself caught in the China-U.S. fight over chip export restrictions, and shares lost as much as 25% going into the fall. Regulators knew that ASML served as the lynchpin of advanced semiconductor manufacturing, so they banned sales of extreme ultraviolet (EUV) chipmaking machinery to kneecap China’s growing chipmaking business.
However, Western governments have since realized that choking off ASML’s business entirely is a bad idea. Roughly a quarter of ASML’s total operating costs come from its R&D department, and ASML needs to keep innovating to stay ahead of the competition. Subsequent export restrictions have since been watered down to include only the latest models.
That’s had a predictable effect on earnings estimates and share prices. Analysts have been nudging their 2024-2025 estimates up across the board, and shares have risen over 50% since October. It’s why InvestorPlace.com’s Chris MacDonald continues to recommend shares of this impressive firm.
“ASML’s top position in EUV technology is critical for semiconductor advancement, especially in advanced memory solutions. CEO Peter Wennink maintained a humble outlook despite positive signs of a 2024 revenue similar to the previous year. The company sets eyes for significant growth in 2025.”
Tencent (TCEHY)
Many Chinese firms will win thanks to AI nationalism. The Chinese government has a $40 billion state fund to boost the semiconductor industry, and dozens of chipmaking firms have sprung up to take advantage of the handouts. Semiconductor Manufacturing International (SMIC), Hua Hong Semiconductor, Nexchip Semiconductor and United Nova are among these names.
However, the “safest” of Chinese AI plays is most likely Tencent Holdings (OTCMKTS:TCEHY), a monopolistic software giant with few strong competitors. Unlike Alibaba (NYSE:BABA), Tencent has remained on the right side of the Chinese Communist Party (CCP). Its CEO has never “disappeared” for months on end. And Tencent has been far better managed than Baidu (NASDAQ:BIDU), China’s top search-engine company, which failed to recognize opportunities in cloud computing. Tencent has masterfully navigated M&A deals across the greater China region, earning north of 20% returns.
Most importantly, Tencent has no stake in the cut-throat world of semiconductor manufacturing. The company focuses on mobile games, online chat, enterprise businesses, music streaming and other high-margin tech services that AI will make even more profitable. Analysts expect the firm to earn 30% operating margins going into 2024. (SMIC, by comparison, barely covers its cost of capital.)
The Chinese tech giant also has significant exposure to cloud computing, business services, and fintech, which fits neatly into its AI ambitions. In 2022, this segment eclipsed its gaming sales, and analysts see this as a significant growth area for the next several years. Josh Enomoto at InvestorPlace.com sees at least 34% upside from current prices, while a successful pivot to AI would mean even more.
Of course, Tencent comes with the broader risks of buying Chinese stocks. The country has recently seen an exodus of investors, driven out by fears of real estate contagion and a rapidly decelerating economy. The tech firm also remains beholden to the whims of the CCP; in December, Tencent’s shares fell double-digits after Chinese regulators announced a wide range of rules aimed at curbing spending on video games. (The CCP would later fire a top government official over the resulting market meltdown, sending Tencent’s shares back up.)
Still, Paul La Monica sees this most recent drawdown as an opportunity to buy Chinese shares cheaply. He notes that insiders have recently snapped up shares.
“The reported stock purchases by Ma and Tsai are certainly a sign of confidence and could suggest that Alibaba and the overall Chinese stock market have bottomed. Investors are also growing increasingly optimistic about the possibility of more stimulus from Beijing. Bloomberg reported Tuesday that a nearly $280 billion market stabilization package is in the works, where state-owned financial companies would buy up local shares of Chinese stocks.”
And now that even Chinese President Xi Jinping is attempting to calm investors, this likely marks as the best time in years to buy shares of Tencent.
The New AI Wars
So far, we’ve talked about the large companies helped by direct government intervention. These are essentially the equivalent of the South Korean family-run conglomerates (chaebol), or the eight conglomerates of Japan. Dependable and protected… but with somewhat limited upside because of their size.
Meanwhile, Luke has ventured further to find the secondary winners of this new AI reality. Though his research, he’s found incredible growth companies that are leading innovation, even without much government help. Many of these firms could even rival the big players someday. And to get you started, Luke releases a new report this week that outlines five 1,000% winners for The AI Endgame. To reserve your spot for that event on Tuesday at 8 p.m. Eastern — and to learn how to get that report — click here.
And I’ll see you back here next Sunday…
Regards,
Thomas Yeung, CFA
Markets Analyst, InvestorPlace.com
On the date of publication, Thomas held LONG positions in GOOG and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.
