The roots of artificial intelligence (AI) technology go back decades but the proliferation of AI stocks occurred much more recently as artificial intelligence took hold following the release of OpenAI's ChatGPT.
This has sparked an explosion of demand for all things AI, which in turn has lifted the market value of companies with exposure to the evolving technology. The most notable example is AI bellwether Nvidia (NVDA), which makes chips that are designed to handle the tremendous amount of data required to train AI models. In just two short years, NVDA's market cap has grown by more than $2 trillion.
At the core of this is generative AI, which creates data, such as text, images and video, and has massive utility for businesses, says Steve Phillips, CEO and cofounder of Zappi.
"With the growing popularity of generative AI, like ChatGPT, consumers are realizing its utility in augmenting day-to-day activities," Phillips adds. "With AI in the mainstream, we can expect a sizable boost in business adoption to follow suit. More operators will look for creative ways to leverage the technology and build more efficient processes, without expanding budgets."
The impact of generative AI is expected to grow by leaps and bounds throughout the remainder of the decade. Indeed, according to data research firm Statista, the market size for artificial intelligence is expected to hit $184 billion this year and grow at an annual growth rate of 28.5% through 2030.
That growth should mean great things for Wall Street's best AI stocks, including the seven that we analyze below.
Data is as of July 26. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $2.78 trillion
- Dividend yield: 0.04%
One of the best stocks to buy to gain exposure to AI is Nvidia (NVDA, $113.06). The company is the pioneer in GPUs, which provide for immersive graphics. But the technology has also proven effective for advanced AI models. A big reason is that GPUs can process a huge amount of data in parallel.
As for Nvidia, the company was smart to invest heavily in the AI market. The result is that its GPUs are the standard.
But the success for one of Wall Street's best AI stocks is more than sophisticated chips. NVDA has the Cuda software development system and various AI libraries. Because of this, the company has a global ecosystem of AI researchers and developers. According to one study, Nvidia GPUs are cited 19 times more than rival chipmakers in academic papers.
"We view NVDA as *the* AI company: a sustainable leader in massive parallel and heterogeneous compute chips, software, and recently services, to enable AI & related applications," says Truist Securities analyst William Stein (Buy). The analyst adds that Nvidia's leadership in the space is driven by "its culture of innovation, ecosystem of incumbency, and massive investment in software, AI models, and services, that we believe makes its chips a default choice for most engineers building AI systems."
Demand for Nvidia's chips is certainly seen in its top line. In its first-quarter earnings report, the company said revenue was up 18% quarter-over-quarter and nearly quadrupled year-over-year. And its data center revenue surged fivefold from the year-ago period thanks to AI.
For investors looking at a long-term play on AI, NVDA looks like a winner among semiconductor stocks.
- Market value: $3.16 trillion
- Dividend yield: 0.7%
In early 2023, Microsoft (MSFT, $425.27) CEO Satya Nadella said, "The next major wave of computing is being born, as the Microsoft Cloud turns the world's most advanced AI models into a new computing platform."
A big boost has definitely come from OpenAI. All told, Microsoft has invested roughly $13 billion in the company. This partnership has helped fuel MSFT's AI initiatives – and boost its top- and bottom-line.
Indeed, in its most recent earnings report, MSFT disclosed year-over-year earnings growth of 20%, while revenue was up 17%.
CFRA Research analyst Angelo Zino expects this growth to continue. "We believe MSFT has the greatest line of sight from organizations investing heavily in AI development tools, AI applications, and AI services," Zino says. "MSFT is riding this wave of investment with its complete AI stack from AI infrastructure to AI development services like Azure AI and even AI applications like Microsoft Copilot."
Zino has a Strong Buy rating on the Dow Jones stock and a $490 price target, representing implied upside of 15% to current levels.
- Market value: $7.2 billion
- Dividend yield: N/A
A recent Gartner survey of chief information officers shows that cybersecurity is the top priority for companies. About 80% of the respondents indicated that they planned to increase spending on this technology this year.
This really should be no surprise. The cyber-threat environment is getting more dangerous and brazen.
But AI can help out. In real-time, it can detect harmful intrusions and remediate them.
One of the best AI stocks for cybersecurity is SentinelOne (S, $23.04). Founded in 2013, the company has built the Singularity XDR Platform. Think of it as an autonomous security system. It monitors endpoints, cloud workloads, IoT (Internet-of-Things) and cloud containers for potential threats. The system will then quickly fix the problems.
And the growth for the cybersecurity stock has been strong. For the latest quarter, the company reported a 40% year-over-year jump in revenue to $186.4 million and the number of customers with annual recurring revenues of over $100,000 rose by 30% to more than 1,193.
- Market value: $60.5 billion
- Dividend yield: N/A
In the early days of PayPal (PYPL), the company almost failed because of the rampant fraud on the platform. But cofounder and CEO Peter Thiel implemented sophisticated analytics and AI to mitigate the problems. These systems worked extremely well and PayPal would eventually sell to eBay (EBAY) for $1.5 billion in 2002.
Thiel realized there were other applications for the AI technology, such as for systems to detect terrorism or threats on the battlefield. He took part of fortune from the PayPal windfall and created Palantir Technologies (PLTR, $27.18).
While the government would remain important for Palantir – especially with the wars in Afghanistan and Iraq – the company has since diversified into commercial markets. They span industries like healthcare, energy and manufacturing.
At the heart of this is the Foundry system. Palantir considers it an operating system for an organization's data. The system also helps to create, deploy and manage AI models. For example, Tyson Foods (TSN) has realized $200 million in annualized savings over a 24-month period.
In its fiscal first quarter, Palantir reported a 21% year-over-year increase in revenue to $634 million and the customer count grew by 42%. The company also said adjusted free cash flow (AFCF) was $149 million, marking the 10th straight quarter that AFCF was positive.
- Market value: $7.5 billion
- Dividend yield: N/A
Back in 2009, a Carnegie Mellon University professor, Luis von Ahn, as well as one of his students, Severin Hacker, came up with the idea for Duolingo (DUOL, $173.28). They wanted a much more affordable way for people to learn languages. This was something that von Ahn experienced while growing up in Guatemala.
The timing was fortuitous because of the emergence of mobile platforms from Apple and Alphabet (GOOGL). The founders also were prescient in leveraging AI models.
The company has used this technology for all the key parts of the Duolingo system. These include curriculum design, raw content creation, exercise creation and lesson personalization.
However, this is not to imply that everything is automated. Duolingo blends human expertise with its AI platform. This is especially the case with curriculum design, which must abide by high-levels of educational standards.
A key competitive advantage is Duolingo's enormous data set. This is the benefit of having 97 million MAUs (monthly active users) and 31 million daily active users (DAUs).
To generate revenue, the company relies on a freemium model. The core app is free and there are paid options for additional features. In the most recent quarter, the company announced a 45% year-over-year increase in revenue to $167.6 million and 54% growth in paid subscribers to 7.4 million.
And considering there are roughly 1.5 billion language learners across the globe by some estimates, there's certainly lots of room for more growth for one of Wall Street's best AI stocks.
- Market value: $43.2 billion
- Dividend yield: N/A
Traditional databases were not built for the complex requirements for AI. So yes, there have emerged next-generation solutions.
A standout is Snowflake (SNOW, $129.00). The founders of the company were veterans from companies like Oracle (ORCL). In other words, they understood the limitations of legacy database technology. With Snowflake, the approach was to start from scratch.
This meant creating a database in the cloud, which would allow for easily scaling the workloads. The founders also made sure that it was easy for users to get started. Spinning up a database took only a few minutes. Then there was strong governance and security infrastructure.
Snowflake has certainly become an effective tool for AI projects. The technology has also been a source of strong growth. In its latest quarter, Snowflake posted a 34% year-over-year increase in revenue to $789.6 million and the net revenue retention rate was 128%. There are 9,822 total customers and 485 had 12-month trailing revenues of over $1 million.
The market opportunity for Snowflake, a member of the Berkshire Hathaway equity portfolio, is enormous, estimated to be about $248 billion. This is great news for investors seeking out the best AI stocks to buy now.
- Market value: $2.5 billion
- Dividend yield: N/A
It is estimated about 1.5% to 5% of the U.S. population suffers from cardiac arrhythmia. The most common type is atrial fibrillation (AFib), which was the cause of more than 28,000 deaths in 2021, according to the Centers for Disease Control and Prevention (CDC).
But there are innovative wearable devices that can help. A leader in this category is iRhythm Technologies (IRTC, $88.34). The company is the developer of the Zio monitor, a small and comfortable device that detects and diagnoses irregular heart rhythms.
An essential part of this is a powerful AI system that is based on a sophisticated deep neural network with 34 layers. It has been trained on over 5 million patient records and more than 1 billion hours of curated heart-beat data. "Zio by iRhythm has the only FDA-cleared deep learned algorithm that detects 13 types of arrhythmia classes in this space that has been included as part of the CPT code validation process," the company explains.
"Zio by iRhythm utilizes AI for classifying and characterizing diverse heart rhythms, including atrial fibrillation or AFib," said Evangelos Hytopoulos, the senior director of data science at iRhythm Technologies. "iRhythm's deep learned algorithm has been clinically proven to be as accurate as expert cardiologists."
While IRTC has had operational issues that have hampered growth, it appears to be turning a corner. In the latest quarter, the company posted an 18.4% year-over-year increase in revenue to $131.9 million. It also raised its full-year revenue forecast. Investors would be wise to keep IRTC on their list of the best AI stocks.
