Stocks generally don't move in a straight line. Yes, countless technology and artificial intelligence (AI) stocks have enjoyed a pretty straight path to higher prices since the beginning of last year. But recent volatility has reminded investors that even AI stocks are prone to a sell-off. Are you a long-term investor looking to own great stocks for years at a time? If so, a sell-off is a gift!
There are businesses behind every stock. Buying cheaper shares means you're more likely to enjoy better investment returns as these businesses grow.
Unfortunately, I can't tell you if the recent sell-off will worsen. Nobody knows what stocks will do in the short term.
But I can give you a list of top-tier AI stocks. Consider scooping these three up if the sell-off continues:
1. Palantir Technologies
AI's long-term potential could depend on how companies utilize it in their existing businesses. Palantir Technologies (NYSE: PLTR) arguably stands out as the company making the most headway in that regard. Palantir develops custom software applications that analyze data and provide real-time outputs. The use cases range from optimizing operations inside hospitals to helping the military conduct complex missions. This highly diverse technology creates broad appeal and shows up in Palantir's business results.
Palantir's revenue growth has accelerated since the company launched its Artificial Intelligence Platform (AIP) last year. Revenue from private sector U.S. customers grew 55% year over year in the second quarter, but the remaining value on those deals (booked but not yet recognized) more than doubled. The company's U.S. customer count rose to 295, an 83% increase from a year ago and a 13% increase from the prior quarter. This data points to building growth momentum as companies flock to Palantir for help tapping into AI technology.
Analysts believe this momentum will help Palantir grow earnings by an average of 30% annually for the next three to five years. Unfortunately, Palantir's forward P/E of 87 already reflects much of that exciting growth. Investors should keep Palantir atop their shopping list if volatility knocks the stock down a peg or two.
2. Taiwan Semiconductor
Running AI models requires serious computing power, which has sparked intense demand for AI chips. Nvidia has been a big winner, but investors should look at Taiwan Semiconductor (NYSE: TSM). You see, Nvidia and most other semiconductor companies don't manufacture the chips they sell. Instead, they go to a fabricator, a company that manufactures semiconductors. Taiwan Semiconductor is the world's leading chip fabricator, manufacturing 61% of the global chip supply.
As the largest fabricator, Taiwan Semiconductor has an inside track to winning opportunities to manufacture advanced chips, such as those powering Apple's iOS devices and Nvidia's coveted AI chips. The AI boom revved Taiwan Semiconductor's revenue growth to nearly 33% year over year in Q2. The global semiconductor market is estimated to grow by 8.8% annually for the next decade, directly benefiting the world's top chip fabricator. Analysts believe Taiwan Semiconductor will grow earnings by 26% annually over the next three to five years.
Geopolitical tensions between Taiwan and China are Taiwan Semiconductor's most significant risk. This could explain the stock's cheap valuation; its forward P/E of 26 is arguably a bargain, considering its anticipated growth. The risks are legitimate, but the stock might become too cheap to ignore if a sell-off takes it even lower.
3. Arm Holdings
One could say that investing in Arm Holdings (NASDAQ: ARM) is like collecting a royalty on technology. The company designs architecture for central processing units (CPUs), which act like the brain for most electronic devices. Arm-based chips operate mobile phones, personal electronics, vehicles, factory equipment, cloud computing, and more. Arm has an estimated 50% global market share and is rising across most end markets. The company earns royalties and fees on every chip built on its designs, making it remarkably profitable with an over 95% gross margin.
Artificial intelligence is poised to be huge for Arm; management estimates more than 290 billion Arm-based chips have shipped since the company's inception. Keep in mind that Arm goes back to 1990. Arm believes 100 billion AI-equipped Arm chips will ship by the end of its fiscal year 2026. That's about a third of its historical volume over the next several years. Translation: AI is creating tremendous growth at Arm. Analysts believe Arm's earnings will grow by 25% annually during that time (the next three to five years).
The stock's only drawback is its valuation; shares trade at a forward P/E of 80. That's probably too steep for most investors despite such strong growth. Like Palantir, Arm Holdings is a tremendous stock priced to perfection today. Keep Arm on your radar and be ready to take advantage of any sell-off.
Should you invest $1,000 in Palantir Technologies right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in 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