Artificial intelligence stocks have been on the rise in recent years. Artificial intelligence (AI) is the process of high performing machines (computers) that mimic problem solving, tasks and decision making. In this 2004 paper, John McCarthy, described AI as ”the science and engineering of making intelligent machines, especially intelligent computer programs.
Over the last decade, AI and machine learning have been an integral part of every business making decision processes. Artificial intelligence stocks can be a great way for investors to benefit from the advances in AI and machine learning. Below we will list our top 3 AI stocks to consider in 2022.
Why Invest In Artificial Intelligence Stocks?
The AI will put the data to work and automate several things, from making intelligent suggestions to shortlisting options to executing tasks without human intervention. The adoption of AI is happening at three levels; hardware, software, and services.
International Data Corporation (IDC) forecasts the global AI market to grow 19.6% year over year to $432.8 billion in 2022. IDC expects spending on AI services and hardware to increase at a CAGR of 22% and 20.5%, respectively, in the next five years.
AI revolution is still growing and has an untapped market. The next-gen AI will have self-driving cars, smart cities, and robotics. Three companies are leading the AI revolution at the hardware, software, and service front.
Nvidia Corporation (NASDAQ: NVDA)
Nvidia is a default choice when you speak AI, gaming, metaverse, and autonomous cars. This graphics card maker has unmatched technology for heavy computing hardware. Nvidia offers data centers and computer GPUs for deep learning and inferencing. It is working alongside healthcare companies for AI in healthcare, automakers for autonomous vehicles, game developers and almost all verticals.
After several years of strong growth, Nvidia enjoys over 50% revenue growth rate (as per fourth-quarter figures) driven by data centers and gaming. Automotive continues to be a weak segment as the chip supply shortage grapples the industry. The company enjoys a 39% net margin and has a strong balance sheet, with US$10.2 billion net cash. It is among the few tech hardware companies that pay cash dividends.
The management is growing its business while keeping shareholders’ interests in check. The stock surged a whopping 200% in five years from September 2015-September 2020. After a tepid growth for a few months, it grew 156% between March and November 2021. This shows the stock still has triple-digit growth potential. In the recent tech sell-off, the stock fell 26% from its November 2021 high, creating an opportunity to grab this high-growth artificial intelligence stock.
Alphabet Inc (NASDAQ: GOOG)
Gartner forecasts the AI software market to grow 21.3% to $62.5 billion in 2022. It expects AI software spending to be highest in knowledge management, virtual assistants, autonomous vehicles (AV), digital workplace, and crowdsourced data. Do these areas ring a bell? Google has it all from Google workspace to its AV project Waymo.
AI is about accessing collected data and making it useful. Google, with its digital product stack (Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube), has tons of data. It’s business revolves around accessing data, and it is now using AI to make this data useful. For instance, Google uses AI tools for ad pricing, content promotion, and email spam filters.
Bank of America has rated Google stock a buy because of “artificial intelligence/machine learning advantages across the product stack.” The web search giant enjoys 29% net margin and 41% revenue growth in 2021. After all these years, the stock still has double-digit growth. It surged 35% in the last 12 months and 225% in five years.
Furthermore, in Alphabet’s latest earnings report, the company announced quarterly sales of $75.3 billion, up 32% year-over-year. Earnings per share (EPS) was $30.69 vs $30.01 estimated, beating analyst top and bottom line expectations. They also announced a 20 for 1 stock split, to be approved be shareholders on July 1st, 2022. In the recent market sell-off due to war, the stock fell 9%, creating an opportunity to buy this artificial intelligence stock at a 7x price to sales ratio.
International Business Machines Corporation (NYSE: IBM)
The last feather in the AI cap is the AI IT services market. IBM is a market leader in AI Software Platforms, AI applications, and AI System Infrastructure Software, according to IDC. In its 110 years of existence, IBM has evolved with technology from classic mainframe computers to cloud and cognitive software to AI. The company is transforming, including the spin-off of its IT infrastructure services business Kyndryl. This business was limiting its growth, and the spin-off made IBM lucrative in terms of growth.
After a spin-off, IBM provides AI-centric business and IT services. It helps companies across verticals adopt AI-enabled automation in the business processes by developing, implementing, and managing AI applications.
IBM is one of those companies that has been paying dividends since 1916. Before Kyndryl’s spin-off, IBM generated $10.8 billion in free cash flow. Even after the spin-off, IBM would retain about $10 billion FCF and expects it to grow high single-digit for the next three years. This means dividends are safe.
IBM stock might not give you double-digit growth like Nvidia and Google, but it will pay regular dividends. This is a prime artificial intelligence stock for investors seeking passive income. The stock dipped almost 9% in the tech sell-off, creating an opportunity to lock in a 5.25% dividend yield.
Artificial Intelligence Stocks Takeaway
Artificial intelligence stocks are penetrating the tech market, leading the way for more innovation in AI and machine learning. Nvidia, Google, and IBM are market leaders in three segments of AI. This can give investors comprehensive exposure to the fast growing AI opportunity over the next decade.
Disclosure: The author holds no position mentioned in this article. Freedom Stocks has a disclosure policy.
