Top 5 AI Stocks To Buy

One of the recurring themes in The Juice and our sister newsletter, The Spill, is that to invest in artificial intelligence, you don’t have to reinvent the wheel. 

The leaders in AI are right in front of your eyes. 

As we noted the other day, AI-specific ETFs don’t always make sense. Sometimes the stocks they own don’t seem to make sense. 

If I want to invest in AI, why in the world would I buy Spotify (SPOT)?

And, even if the list of holdings make sense, you’ll often pay too high an expense ratio to justify going with a thematic AI ETF or one that tracks too specialized of an index. 

To get the companies powering AI — the ones providing the infrastructure — one solid route is a low-cost, semiconductor index ETF, such as the VanEck Semiconductor ETF (SMH). 

Of course, SMH’s top holding is Nvidia (NVDA), which is also the AI stock financial professionals have been searching for most across our network of 100+ financial media partners, as reflected in our Trackstar database. And, of course, like NVDA, SMH has taken a little bit of a beating recently. 

Both names are down roughly 8% over the last month. Big however, SMH is up approximately 46.5% over the last six months. NVDA skyrocketed about 95.6% over the same period. Extend the time periods and the returns are even more impressive. 

If you’ve been around long enough — like, for a minute — you’ve seen this story play out a zillion times. A stock, ETF or sector goes hard then corrects. People freak out acting like a small correction is a crash. They wonder if we’ve seen the top. They express concern over more downside. They ask is AI a fad? 

We have a strategy to deal with this uncertainty. 

But first, speaking of The Spill, we really like what our sisters did over there last week in this regard when they gave NVDA a nine out of 10 rating:

This week, big tech earnings took the focus, with heavy hitters like Meta Platforms (META) and Microsoft (MSFT) reporting earnings.

Yet, no one has more pressure to perform than Nvidia (NVDA).

Forecasts put 2024’s growth up 71.6% compared to the trailing 12-month 125.9%.

Financial pros continue to search out this stock more than any other AI company despite earnings being a month away.

And, for the record, since The Spill wrote that search interest among financial pros for NVDA has stayed the same and both Meta and Microsoft leapfrogged Advanced Micro Devices (AMD). 

Anyhow, The Spill continues with some common sense on Nvidia:

Nvidia’s revenue growth is incredible, especially for a company of its size.

Yet, the margin expansion got investors giddy over the past year.

Almost half of every dollar of revenue turns into free cash flow, which is astounding.

To give you an idea of the scale, Nvidia generates almost $27 billion in free cash flow annually, or $11.30 per share.

The company only spends about $1.0 billion on Capex annually.

Plus, it holds just $11.1 billion in debt while carrying $26.0 billion in cash.

If Nvidia needs to spend to grow, it has the money to do so.

And the final word:

Nvidia is a risky stock because of its price action, not its value.

We don’t foresee a massive pullback in AI chip spending in 2025.

As AI usage broadens, we see a higher and more stable demand for Nvidia’s chips.

As long as they can out-innovate their customers, Nvidia will have plenty of growth in the future.

We feel similarly about all of the names populating the list of the most-searched AI stocks. Even Advanced Micro Devices (AMD), which got hit this week for freaking beating Wall Street estimates and keeping future expectations inline with current forecasts. Don’t be surprised to see AMD beat in upcoming earnings reports. 

The Spill also noted that some people are concerned about NVDA because Meta and Alphabet (GOOGL) are creating their own AI chips in house. We say the more the merrier. There’s plenty of room in this pool. There relationships seem to be as collaborative as they are competitive. 

Here again, buy the names that develop and deliver AI infrastructure and the companies on the forefront of using/integrating AI in their platforms. 

Most investors should simply dollar cost average into these stocks. This means buying regularly (monthly, bi-weekly, whatever) with a set amount of cash allocated to each name. So when the stocks are down, you buy more shares. When they’re higher, you buy fewer. 

And, we don’t think you’d be crazy to buy a few dollars more during these times of what appears to be temporary stock market downside. 

The Bottom Line: Like so much else, you can’t make blanket statements about artificial intelligence. There are concerns associated with it that go beyond demand, such as regulation here and abroad and nefarious uses. We have experienced these issues with something called the internet. And it, as well as the companies that power and lead it, hasn’t slowed down. 

There will be bad actors and some bad that comes from AI. But there will also be some good. No matter how you feel, AI is here to stay and it will, over time, continue to grow and likely be a major contributor to stock market gains.

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