Artificial intelligence (AI) is a complex and rapidly growing technology sector, where investors are fighting for appropriate exposure to AI in their portfolios. One thing is clear: advanced computer chips have become the de facto building blocks of AI. They are needed (in massive quantities) to power these powerful AI operations.
When it comes to picking AI stocks, there have been some clear winners, as well as stocks that haven’t caught fire as one might have expected. AI is still in the early chapters of its history, which means there are still many uncertainties, but also many opportunities to find stocks that will exploit the need for AI to outperform over time.
Here are three AI stocks that investors should consider buying and holding because of the powerful AI tailwinds that should benefit them.
1. Nvidia: This chip leader continues to defy expectations
AI chip powerhouse Nvidia (NASDAQ:NVDA) isn’t the most creative choice for this list, but numbers matter most, and Nvidia has them in spades. Nvidia’s cutting-edge graphics processing units (GPUs) and AI-driven software stack have become the go-to option for large technology companies investing billions of dollars to build data centers to meet computing demands of AI. Some analysts estimate that Nvidia controls as much as 90% of the AI chip market.
To highlight this, look at how Nivida’s revenue has grown over the last 18 months:
Nvidia’s $22.6 billion in data center revenue in the first quarter is almost as much as the total revenue the company generated for the entire 2023 fiscal year (ending January 29, 2023) . This is a massive increase in just 24 months. And the stock price followed; shares are up 585% over the past three years.
But the show may not be over. CEO Jensen Huang said he believes AI will require an additional $2 trillion in data center spending, which could mean Nvidia will benefit from these tailwinds for years. The shares are trading at a Forward P/E 42 today. It’s very interesting if Nvidia can live up to analyst estimates, which are calling for 38% annual profit growth over the next three to five years.
2. AMD: Second place doesn’t seem so bad
Assuming AI becomes as big as it seems, the biggest risk for a company like Nvidia is that it cedes market share for AI chips to its competitors. Who is most likely to challenge Nvidia? Look no further than Advanced microsystems (NASDAQ:AMD), or AMD. That might not seem like a worthy opponent: The chipmaker had $2.3 billion in data center sales in the first quarter, a fraction of Nvidia’s. However, those numbers are up 80% year-over-year, showing signs of life, mainly due to demand for AMD’s MI300 accelerator chips, which compete with Nvidia.
AMD also has a presence outside of data centers. For example, AI-enabled personal computers could represent a significant growth opportunity. AMD’s Ryzen 8000 series processor chips helped post an 85% year-over-year increase in the first quarter in AMD’s customer segment. The big thing…
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