AI is just getting started, and these companies are setting themselves up to benefit.
Artificial intelligence (AI) has quickly become an investing theme for many people as they’ve experienced first-hand the benefits of using AI. But with an increasing number of tech companies betting on this new frontier, it can be hard to sift through the AI hype and find the companies that are actually worth investing in.
Here are three AI stocks that are making a significant impact in the space and why they’re worth buying right now.
Image source: Getty Images.
1. Broadcom
Broadcom‘s (AVGO -0.84%) semiconductor business has expanded over the years to involve wireless, optical, and now AI processing chips. And so far, it’s been a great move for the company.
Sales of the company’s AI-focused optical and networking chips increased 280% in the second quarter, to $3.1 billion. This growth from a relatively new segment for the company has resulted in Broadcom’s AI chip sales accounting for 25% of total revenue in the most recent quarter.
And Broadcom’s management estimates that far more AI sales are just around the corner. The company’s leadership said on its recent earnings call that AI chip sales will surpass $11 billion in fiscal 2024, with Broadcom CEO Hock Tan saying on the call that “we expect the strength in AI to continue.”
Broadcom also has an increasing opportunity to benefit from the custom AI chip market, which could help boost the company’s addressable AI chip market to $150 billion over the next three to four years, according to estimates from JP Morgan. Broadcom already makes custom AI semiconductors for Alphabet and was recently in talks with OpenAI about custom chips, though nothing is set in stone yet.
Compared to similar AI companies, Broadcom’s stock is a pretty good deal right now. The company’s shares have a forward price-to-earnings ratio of 27, far less expensive than another major AI semiconductor player, Nvidia, which has a forward P/E ratio of 42.
2. Palantir
Palantir Technologies (PLTR -1.41%) has long been known for its artificial intelligence software that’s been used by the U.S. government. But the company is now catching the attention of more investors as it expands in the commercial market.
In the second quarter (which ended June 30), sales from Palantir’s commercial segment rose 33% to $307 million and now account for 45% of the company’s total sales. And sales among Palantir’s U.S. customers are growing even faster, prompting management to estimate that commercial U.S. sales will rise 47% to $672 million for the full year.
The good news is that while Palantir has expanded into the commercial AI software segment, its government sales are increasing as well. Revenue from its U.S. government segment increased 24% in the second quarter to $278 million.
In addition to Palantir’s recent AI growth, the company is also in a strong financial position. Palantir is profitable, with $135.6 million in net income in the second quarter, and with a profit margin of 20% and just $1.1 billion in debt.
I should point out that Palantir’s stock isn’t cheap. The company’s shares have a forward P/E ratio of 90 right now, making it the most expensive stock on this list. But I think the company’s expanding commercial AI software sales, stability from its government contracts, and strong financial position make Palantir a worthy AI stock to add to your portfolio right now.
3. Microsoft
I know Microsoft (MSFT -0.12%) doesn’t garner the same excitement from AI investors as smaller companies do, but it deserves a spot on this list as one of the largest investors in OpenAI and as a leading cloud computing and software company.
Microsoft has invested at least $13 billion in ChatGPT creator OpenAI so far and could invest more in an upcoming funding round OpenAI is about to undergo. Microsoft’s ability to see OpenAI as a significant tech disruptor shouldn’t be overlooked, as its investment has given it access to some of the best AI software available.
Microsoft has made good use of its OpenAI investment, quickly integrating some of AI into its Office 365 software and GitHub developer platform. Microsoft’s management said on its recent earnings call that CoPilot accounted for over 40% of GitHub’s revenue growth this year and noted that the AI assistant has helped boost the platform’s annual revenue run rate to $2 billion.
In addition to its AI-powered software opportunity, Microsoft is benefiting from AI integration in its Azure cloud services. The company says that its OpenAI services in Azure give customers best-in-class artificial intelligence capabilities, and Azure now has 60,000 AI customers, up 60% from the year-ago quarter.
Offering the best AI cloud services is critical for Microsoft, which is the second-largest cloud computing company with 25% of the market.
As an established tech leader and significant investor in OpenAI, Microsoft gives investors a unique AI opportunity. And with a forward P/E ratio of 31, Microsoft’s stock is cheaper than that of many small AI start-ups right now. With its early moves in AI and rapid integration of AI capabilities into its core software and cloud products, Microsoft looks like a smart long-term AI bet.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, JPMorgan Chase, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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