These AI stocks are likely to remain leaders for years to come.
Almost every technology company is touting its AI credentials these days. I don’t blame them, considering that AI represents a valuable addition to many programs and services.
But just because a lot of companies are quickly integrating AI into their offerings, doesn’t mean they’re top AI stocks. Instead, you should look for leaders who are doing the best in the sector and setting the pace in the AI race. Here are three of the best AI stocks at the top of the pack that are worth buying now.
Image source: Getty Images.
1. Palantir
Palantir Technologies (PLTR 4.49%) was in the business of helping organizations sort through data before AI became commonplace. For years, it focused on using artificial intelligence to help the government analyze large amounts of data, but it has since expanded into the commercial market.
Its early leadership in this field is beginning to bear fruit. The company just announced results for its third quarter (which ended September 30), where revenue rose 30% from the same quarter last year to $726 million and adjusted earnings per share rose 43% to $0.10.
U.S. commercial revenue, a fast-growing part of Palantir’s business, increased sales 54% to $179 million and represented about a quarter of the company’s total revenue in the quarter. Part of that growth comes from Palantir’s impressive customer growth, which rose 39% in the quarter amid 104 customer deals worth $1 million or more.
If I have any hesitation about Palantir, it’s the company’s high valuation. Palantir shares have a forward price-to-earnings of 101 right now. This is expensive by all standards.
However, the company is clearly making the right moves in the AI race and is also profitable, not to mention having $4.6 billion in cash and cash equivalents. With its customers closing its doors in search of technology, and sales and profits growing at a healthy rate, Palantir likely has more room to run.
2. Nvidia
Nvidia (NVDA -0.84%) is one of the obvious choices when it comes to top AI stocks. For years, the company dominated the graphics processing unit (GPU) market when they were primarily used for gaming, but now its GPUs are the leading choice for powering AI data centers as well.
Latest estimates suggest that Nvidia chips account for between 70% and 95% of the AI chip market, and its latest product lineup – including its popular H200 processor – is likely to keep the company ahead of the competition for some time.
You may be wondering whether demand for AI chips could be high enough to fuel Nvidia’s sustainable growth, and for that reason, I would say that both Nvidia CEO Jensen Huang and Goldman Sachs believe $1 trillion in AI spending will happen within years. The next few, most of which will be directed to data centers.
Even with the impressive 380% increase in Nvidia’s stock price over the past three years, its forward P/E of 35.8 is still relatively low compared to some other AI stocks. This still isn’t cheap, but Nvidia is the clear leader in the AI processor market, and AI spending is still a work in progress.
The company’s flagship and advanced processors should help keep it ahead of the competition, and the intense AI race starting now among all the tech companies will be the fuel that keeps Nvidia’s fires burning for some time.
3. Semiconductor manufacturing in Taiwan
There is another crucial angle that investors can play in the AI space, and it comes in the form of chip manufacturing. There are the chip designers, like Nvidia, and then there are the companies that actually make the processors, like Taiwan Semiconductor Manufacturing (TSM, +0.01%).
TSM makes about 90% of the world’s most advanced processors, and the AI boom is fueling the company’s growth. TSM reported impressive third-quarter financial results a few weeks ago (for the period ending September 30), with sales up 39% to $23.5 billion and diluted EPS up 54% to $1.94 per American depositary receipt (ADR).
TSM management said growth in the third quarter came from “strong demand for smartphones and artificial intelligence” and that there is more on the way. The company estimates that fourth-quarter sales will jump 35% at the midpoint of guidance.
TSM has the lowest forward P/E ratio on this list, at just 21.2, making it a relative bargain compared to its AI peers. With TSM being the leading manufacturer of advanced chip processors, the company is poised to continue to benefit as more companies increase their spending on AI data centers.
Chris Niger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
