Stocks generally don’t move in a straight line. Yes, countless technology and artificial intelligence (AI) stocks have traveled a fairly straight path to higher prices since early last year. But recent volatility has reminded investors that even AI stocks are vulnerable to a sell-off. Are you a long-term investor who wants to own great stocks for years to come? If so, a sell-off is a gift!
Behind every stock are companies. If you buy cheaper stocks, you are more likely to benefit from a higher investment return as those companies grow.
Unfortunately, I can’t tell you whether the recent sell-off will get any worse. Nobody knows how stocks will perform in the short term.
But I can give you a list of the best AI stocks. If the sell-off continues, here are three to consider:
1. Palantir Technologies
The long-term potential of AI may depend on how companies use it in their existing business areas. Palantir Technologies (NYSE:PLTR) is arguably the company making the most progress in this regard. Palantir develops custom software applications that analyze data and deliver real-time results. Use cases range from optimizing hospital operations to helping the military carry out complex missions. This extremely diverse technology is of interest to many and is reflected in Palantir’s business results.
Palantir’s revenue growth has accelerated since the company launched its Artificial Intelligence Platform (AIP) last year. Revenue from U.S. private sector customers rose 55% year over year in the second quarter, but the remaining value of those deals (booked but not yet accounted for) more than doubled. The company’s U.S. customer count grew to 295, up 83% year over year and 13% quarter over quarter. These data suggest increasing growth momentum as companies flock to Palantir for help leveraging AI technology.
Analysts believe this momentum will help Palantir achieve average annual earnings growth of 30% over the next three to five years. Unfortunately, Palantir’s forward P/E of 87 already reflects much of this exciting growth. Investors should keep Palantir at the top of their buying list if volatility pushes the stock down a notch or two.
2. Taiwanese semiconductor
Running AI models requires enormous computing power, which has led to a huge demand for AI chips. NVIDIA was a big winner, but investors should look Taiwan Semiconductor (NYSE:TSM). Nvidia and most other semiconductor companies don’t make the chips they sell themselves. Instead, they go to a manufacturer, a company that makes semiconductors. Taiwan Semiconductor is the world’s leading chipmaker, producing 61% of the world’s chip supply.
As the largest manufacturer, Taiwan Semiconductor has the best chances to produce advanced chips, such as those for AppleiOS devices and Nvidia’s coveted AI chips. The AI boom pushed Taiwan Semiconductor’s revenue growth to nearly 33% year-on-year in the second quarter. The global semiconductor market is expected to grow 8.8% annually over the next decade, directly benefiting the world’s largest chipmaker. Analysts expect Taiwan Semiconductor to increase its profits by 26% annually over the next three to five years.
Geopolitical tensions between Taiwan and China are the biggest risk facing Taiwan Semiconductor. This could explain the stock’s low valuation; its forward P/E of 26 is arguably a bargain given its expected growth. The risks are legitimate, but the stock could become too cheap to ignore if it falls even further in a sell-off.
3. Arm Holdings
One could say that investments in Arm Holdings (NASDAQ:ARM) is like collecting royalties on technology. The company designs architectures for central processing units (CPUs), which act as the brains of most electronic devices. Arm-based chips power mobile phones, consumer electronics, vehicles, factory equipment, cloud computing, and more. Arm has an estimated 50% global market share and is growing in most end markets. The company earns royalties and fees on each chip based on its designs, making it remarkably profitable, with gross margins of over 95%.
Artificial intelligence will be a huge success for Arm. Management estimates that more than 290 billion Arm-based chips have been shipped since the company was founded. It’s important to remember that Arm dates back to 1990. Arm expects to ship 100 billion AI-equipped Arm chips by the end of fiscal year 2026. That’s about a third of the historical volume over the next few years. That means: AI is driving enormous growth for Arm. Analysts expect Arm’s revenue to grow by 25% annually during this period (the next three to five years).
The only downside to the stock is its valuation; shares trade at a P/E ratio of 80. That’s probably too high for most investors despite strong growth. Like Palantir, Arm Holdings is an excellent stock that’s perfectly valued today. Keep an eye on Arm and be ready to profit from any sell-off.
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Justin Pope does not own any stocks mentioned. The Motley Fool owns and recommends Apple, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) Companies to Watch Amid the Tech Stock Sell-Off was originally published by The Motley Fool.
