2 of the Best AI Stocks to Buy Now

Have you ever used artificial intelligence (AI)? The answer is very likely “Yes.”

I know that because AI is already an active part of internet searches, streaming TV networks, social media platforms, e-commerce, traffic and weather services, and even banking operations. Each time you use one of those services, your experience is enhanced by AI.

The technology has captivated the investment community in 2023 because several start-ups have showcased the abilities of their AI projects. The surge in interest in AI began with the debut of OpenAI’s ChatGPT platform, which is a computer system that simulates human intelligence processes, enabling it to effectively answer complex questions, write computer code, and even recognize images without direct human assistance.

The corporate sector is now racing to integrate AI into as many products and services as possible, as leadership teams see opportunities to boost productivity and increase revenue.

Early adoption will separate the winners from the losers
Research firm McKinsey & Company recently released a series of projections detailing the potential impact of AI on the broader economy. According to its forecasts, by 2030, up to 70% of companies will have integrated the technology into their businesses in some capacity, creating an additional $13 trillion in global economic activity.

But early adopters of AI stand to gain the most. By integrating it today and developing it over the next five to seven years, companies stand to increase their free cash flow by 122% by 2030, McKinsey researchers predict. By contrast, those businesses that wait until later in the decade to start adopting AI might only see a 10% gain, and organizations that don’t use it at all could deal themselves a 23% decline in free cash flow instead.

If McKinsey & Company’s estimates turn out to roughly match reality, investors who identify the leaders in AI today and buy their shares for the long run can expect to book the highest returns on their investments. If you want to be among them, here are two strong candidates.

1. Microsoft
Microsoft (MSFT) has placed itself at the forefront of technology innovations since it was founded in 1975, from software to gaming to cloud computing. Therefore, investors shouldn’t be surprised it has taken an early leadership position in the AI race.

In 2023 alone, Microsoft has invested a rumored $10 billion in ChatGPT creator OpenAI, which it has integrated into its Bing search engine, the Azure cloud platform, and its Teams video collaboration software. The company also invested an undisclosed amount in Builder.ai, which helps small businesses develop software without the need to hire experienced programmers.

The integration of OpenAI into Azure will probably be the most valuable in the long run, especially in the context of McKinsey & Company’s projections, because it allows Microsoft to become a key distributor of advanced AI tools to its cloud customers. Approximately 2,500 businesses had already signed up to use OpenAI on Azure in the first quarter of 2023, which was a tenfold increase in just three months.

Builder.ai could also be a useful addition to Microsoft’s cloud ecosystem in the future. It could pave the way for millions of small businesses to join Azure — businesses that would otherwise pay a third party to develop software for them instead.

Wall Street firm Bernstein thinks AI could double Azure’s revenue, boosting it ahead of Amazon Web Services to become the largest cloud platform in the industry. Investors who want to expose their stock portfolios to AI technology might want to start by buying Microsoft.

2. SoundHound AI
SoundHound AI (SOUN) is no Microsoft. It’s valued at just $592 million right now, and that’s after the 108% surge in its stock price this year. Its focus area is conversational AI, but instead of using text like ChatGPT, SoundHound’s technology understands voice prompts and responds in kind.

If the McKinsey & Company estimate is correct and 70% of companies adopt AI by 2030, then SoundHound could become a very successful provider of the technology.

Automotive giants like Mercedes-Benz, Hyundai, and Honda are using SoundHound to power the AI voice assistants in their vehicles. Drivers can use their voices to request almost any information they want, from weather forecasts to sports results. Unlike the tech giants competing in this space, SoundHound offers a white-label solution that can be fully customized, which is a unique selling point.

The company also serves the entertainment industry. Netflix is on its client list, in addition to a host of restaurants and hospitality businesses.

SoundHound just released its first-quarter results, and while it only generated $6.7 million in revenue, it has a whopping $335.9 million worth of bookings in the pipeline. That figure rose 46% year over year, so expect the company’s revenue to scale quickly from here.

But there are risks. SoundHound lost $26 million in Q1, and it’s a long way from profitability. On a positive note, it just closed a $125 million funding deal, which will secure its financial position for at least the next 12 months. It can use that time to eat into its bookings backlog and really ramp up the business.

Conservative investors should stick to stocks like Microsoft, but SoundHound AI presents an enticing risk-reward proposition for those who can stomach some volatility.

— Anthony Di Pizio

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Source: The Motley Fool