July 23, 2024

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3 Artificial Intelligence Stocks to Buy Now and Hold for Decades

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A microchip in a circuit board powers artificial intelligence.

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Written by Brian Paradza, CFA at The Motley Fool Canada

The massive rally in artificial intelligence (AI) stocks in 2023 helped create new millionaires in record time. The United States reportedly added 600,000 new millionaires in 2023, thanks largely to gains in AI-related growth stocks. Nvidia’s CEO Jensen Huang views artificial intelligence as a new “commodity,” an insight particularly valuable for long-term investors. As AI gains wider adoption globally, the potential for impressive capital gains grows, potentially minting new millionaires over the next decade.

Palantir Technologies (NYSE:PLTR), ARM Holdings (NASDAQ:ARM), and Advanced Micro Devices (NASDAQ:AMD) stock could generate strong revenue and earnings growth as global AI uptake grows, and reward long-term oriented shareholders with sizeable capital gains over the next decade.

ARM Holdings: An AI stock to buy and hold this decade

ARM Holdings stock, up 81.7% this year, is a successful initial public offering (IPO) stock that’s just getting started on the public equity market. Having IPOed in 2023, ARM stock is poised for explosive growth in its first decade, with AI adoption providing a major tailwind.

The British firm owns the intellectual property for low-cost, energy-efficient processor designs, which it licenses to chip designers and manufacturers. ARM processors will power next-generation AI-powered devices, including mobile phones, AI-personal computers (PCs) like the recently launched Copilot+ laptops, Apple devices, and many neural processing units (NPUs) for budget AI computing.

ARM Holdings projects up to 100 billion AI-ready devices by 2025 and aims to capture over 50% of the Windows PC market within the next five years. Some analysts expect the PC market to grow at 9.1% annually, reaching $315 billion by 2029. Notably, ARM recently signed a multi-year deal with Apple extending beyond 2040. ARM’s architecture is crucial for bringing AI capabilities to Apple’s everyday gadgets, and Qualcomm’s success in the Copilot+ PC market with ARM-based chips could strengthen ARM’s position in AI computing over the next decade.

While ARM Holdings stock appears expensive with a forward price-to-earnings (P/E) ratio exceeding 89, high-quality growth stocks often command higher valuations when entering high earnings growth phases. Wall Street projects strong 297% year-over-year growth in ARM Holdings’ earnings this year.

Palantir Technologies stock: Leveraging commercial AI for growth

Palantir Technologies, a leader in military-grade AI for governments, has leveraged its Gotham AI platform to secure reliable cash flows from government contracts. The company’s recent expansion into private business analytics has sparked a new growth phase, promising double-digit earnings growth for decades.

Palantir’s revenue grew by 21% year over year in the first quarter of 2024. Management raised its annual revenue guidance in May, anticipating U.S. commercial revenue to grow 45% year over year, up from the previously expected 40%. As commercial demand for Palantir’s military-grade AI platform accelerates, annual revenue growth may increase from 17% in 2023 to nearly 20.6% this year.

Despite Palantir Technologies’ stock price exceeding average analyst price targets and its forward P/E of 58.9 appearing high, a price-earnings-to-growth (PEG) ratio of 0.8 suggests the stock could be undervalued relative to its long-term growth potential.

Advanced Micro Devices (AMD) stock: A key player in AI chips for decades

Advanced Micro Devices (AMD), a $271 billion semiconductor stock, is vying for market share in the Nvidia-dominated AI chips market. The company’s data centre revenue surged by 80.4% year over year, and its client segment sales increased by 85% in the first quarter of 2024. The future looks bright as AMD’s latest AI accelerators and AI-ready PC chips gain global traction.

AMD recently secured a key position in the AI-PC chips market. The company’s 3rd Gen Ryzen AI neural processing units (NPUs) should achieve 50 tera-operations per second (TOPS), a benchmark no other PC chip manufacturer has reached. TOPS measures computing power for AI chips, and Microsoft requires a minimum of 40 TOPS NPU for a smooth Copilot+ experience. Currently, Qualcomm’s Snapdragon Elite X chips achieve 45 TOPS, Intel’s upcoming Lunar Lake chips could do 40-45 TOPS, and Apple’s latest M4 chips in the iPad Pro may reach 38 TOPS.

AMD’s advantage in the AI-ready laptop market positions its hardware to power a significant portion of AI-capable personal computers over the next decade. Consequently, AMD stock is a must-hold for investors looking to capitalize on the promising AI chips market. Its forward PE of 29.2 looks decent.

The post 3 Artificial Intelligence Stocks to Buy Now and Hold for Decades appeared first on The Motley Fool Canada.

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Fool contributor Brian Paradza has positions in Advanced Micro Devices. The Motley Fool recommends Advanced Micro Devices, Apple, Intel, Microsoft, Nvidia, Palantir Technologies, and Qualcomm. The Motley Fool has a disclosure policy.

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