Artificial intelligence technology, for all the people talking about it, is still in its early stages. While a handful of technology names seem to dominate the space currently, investors looking to invest in AI may be wondering which companies are likely to do better as the field evolves.
Other investors are clearly eager to jump in despite uncertainty. Excitement around the possibilities in AI helped AI stocks pull ahead of the market in the first half of 2024, and a lull in the summer was followed by an autumn rebound. The Morningstar Global Next Generation Artificial Intelligence Index has returned 40.54% for the year to date, versus 28.0% for the broad-based Morningstar US Market Index as of Dec. 12, 2024.
To find the best AI stocks, we look to the Morningstar Global Next Generation Artificial Intelligence Index. The AI stocks on this list are among the index’s top constituents, and they all earn Morningstar Ratings of 4- or 5-stars, as of Dec. 12, 2024, which means they’re undervalued.
Best AI Stocks to Buy
- Microsoft MSFT
- Alphabet GOOG
- Advanced Micro Devices AMD
- Adobe ADBE
- Cognizant Technology Solutions CTSH
- Baidu BIDU
Here’s a little more about each of the best AI stocks to buy, including commentary from the Morningstar analyst who covers the stock. All data is as of Dec. 12, 2024.
Microsoft
Morningstar Rating: 4-Stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: Medium
Industry: Software—Infrastructure
Microsoft starts our list of the best AI stocks to buy now. The software and cloud provider has established a leading AI portfolio with offerings like OpenAI, which is home to ChatGPT. Earlier this year we raised our revenue growth estimates and profitability assumptions for Microsoft based on consistent performance and a solid outlook. This AI stock is priced at a discount to our fair value estimate of $490.
Microsoft is one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Based on its investment in OpenAI, the company has also emerged as a leader in AI. Microsoft has also enjoyed great success in upselling users on higher priced Office 365 versions, notably to include advanced telephony features. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins and deepening ties with customers.
We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $75 billion business, it grew at an impressive 30% rate in fiscal 2024. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud creating seamless hybrid cloud environments. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. Azure also is an excellent launching point for secular trends in AI, business intelligence, and Internet of Things, as it continues to launch new services centered around these broad themes.
Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power platform, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. Last, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.
Alphabet
Morningstar Rating: 4-Stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: Medium
Industry: Internet Content & Information
Alphabet is a holding company that wholly owns internet giant Google, and Google services account for nearly 90% of Alphabet’s revenue. We consider Google an AI front-runner, and its investments in AI are a continuation of the effort to safeguard its core product, Google Search. By leveraging generative AI, Google can improve both its own search quality and its advertising business. Google’s own generative AI offerings, such as Gemini, can avert any major customer/advertiser churn. This cheap AI stock trades 13% below our fair value estimate of $220.
We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true technology behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals including search, artificial intelligence, video, and cloud computing.
Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.
We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.
On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.
Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.
Advanced Micro Devices
Morningstar Rating: 4-Stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: High
Industry: Semiconductors
Advanced Micro Devices is the only semiconductor producer on our list of the best AI stocks to buy now. By partnering with chip manufacturing leader Taiwan Semiconductor Manufacturing, and adopting a chiplet manufacturing strategy, AMD has been able to come to market with more formidable products and greater flexibility to bring new products to market quickly. This affordable AI stock trades 18% below our fair value estimate of $160.
Advanced Micro Devices has a wealth of digital semiconductor expertise and is well positioned to prosper from favorable trends in data centers and artificial intelligence. We consider AMD to be one of two notable firms in graphics processing units, which are especially well suited for AI. The company may play second fiddle to Nvidia in AI GPUs, but its GPU expertise should become increasingly valuable, and lucrative, in the years ahead.
AMD’s primary products include processors and GPUs tailored to PCs, game consoles, and servers. In our view, AMD’s PC and server success stems from the rare x86 architecture license that it possesses from Intel, which allows AMD and Intel to build x86 CPUs for Microsoft Windows PCs. We view it as a heavy lift for Windows to rewrite its x86 software to work with other processors, but Apple made this move in recent years to support its internal ARM-based processors. ARM will likely gain share in the PC market, but we still expect x86-based chips from AMD and Intel to retain leadership in the Windows PC market for quite some time.
AMD has benefited from its outsourced manufacturing model, as its tight relationship with industry leader Taiwan Semiconductor Manufacturing enabled AMD to grab a technological lead as its rival, Intel, stumbled with its internal manufacturing roadmap. We anticipate that AMD will continue to gain market share over the next few years as Intel strives to turn it around, but AMD’s gains could be longer-lasting if Intel were to stumble further.
We think AMD’s data center business should boom over the next few years. Its server CPUs should be in high demand, as should its GPUs suited for AI workloads. AMD pegs the total addressable market for AI accelerators, such as GPUs, at $500 billion by 2028. While we foresee Nvidia capturing the bulk of this value over the next several years, we think that all AI vendors and customers will seek alternatives to keep Nvidia’s dominance at bay, and AMD might be the best positioned to emerge as a second source in AI.
Adobe
Morningstar Rating: 4-Stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: High
Industry: Software—Infrastructure
Next on our list of the best AI stocks to buy now, Adobe trades 20% below our fair value estimate of $590. Adobe lays claim to the go-to software products that creative professionals rely on, such as Photoshop, Illustrator, and InDesign, and we think it has carved out a wide economic moat around its business.
Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The firm has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.
CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento, Marketo, and Workfront acquisitions, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.
The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company; it is now racing to become a $4 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce, has made a file format that is usable on any screen more relevant than ever.
Adobe believes it is attacking an addressable market well in excess of $200 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher-price-point solutions, and cross-sell digital media offerings.
Cognizant Technology Solutions
Morningstar Rating: 4-Stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Medium
Industry: Information Technology Services
Cognizant Technology Solutions is 15% undervalued relative to our $94 fair value estimate. We think this global IT services provider will benefit considerably from demand in digital transformation projects, and AI enablement remains strong. We anticipate that IT servicers like Cognizant will be enablers of enterprise AI, as firms look for experts in this domain to ensure proper AI use and integration.
Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don’t see Cognizant returning to that level of growth in the future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.
Cognizant has admitted that it is first and foremost perceived as a back-office enterprise outsourcer, but we think its existing technical capabilities are strong in more nuanced enterprise IT solutions, such as artificial intelligence services, which will help it become better known for digital transformation. While Cognizant has not lagged in its digital capabilities, we think there’s more work to be done for the company to distinguish itself from competitors as a cutting-edge IT service provider. We believe Cognizant is well aware of this potential and has a healthy balance sheet to push forward in its technical capabilities. Still, a pipeline of work from in-house consultants could help bring down the costly activity of highlighting one’s technical capabilities.
For these reasons, we think Cognizant’s slow entrance into traditional consulting will be a worthy cause in the long run. Despite historical reluctance to enter consulting more meaningfully and offer cloud solutions, we think Cognizant has already turned a corner. We believe Cognizant is on sound footing, like its key peers, to benefit from strong digital transformation trends.
Baidu
Morningstar Rating: 5-Stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: High
Industry: Internet Content & Information
Baidu is the largest internet search engine in China and is pursuing major growth initiatives in AI, video streaming, voice recognition technology, and autonomous driving. We see Baidu’s AI development and emerging technologies as valuable intangible assets but assess these businesses to have narrow moats. This cheap AI stock is 42% undervalued relative to our fair value estimate of $157.
Baidu’s online advertising business accounted for 72% of core revenue in 2023 and will be the main source of revenue in the medium term given its dominant market share for search engines, but we believe unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China’s AI development, but whether Ernie will be the long-term leader will depend on execution as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.
While Baidu is transforming its identity by investing in generative AI, cloud, and autonomous driving, commercialized success remains to be seen. There are encouraging signs of its AI cloud monetization growing to 18% of core revenue in 2023 from 12% in 2020. However, despite sharp growth, we expect Baidu to face competition in the cloud from industry leaders Alibaba, Huawei, and Tencent, which all have greater market share than Baidu. Despite a potential total addressable market for autonomous driving that is 9 times its online advertising per management, commercial success is highly uncertain as revenue remains immaterial, and mass scale adoption or time-to-market are unclear.
Its streaming video service, iQiyi, continues to be a margin drag on Baidu’s business due to a high content cost. The business constantly needs to develop or acquire new content to prevent customer churn. We’re less confident of its outlook than the Core product owing to a low barrier to entry and numerous competitors. Membership has remained stagnant at 100 million subscribers for the past five quarters, and therefore we believe long-term growth is limited.