Brian Colello, CPA
Brian Colello, CPA, is director of technology equity research at Morningstar, Inc., Chicago, which tracks 800,000 investment offerings. Morningstar.com
Eighteen months ago, Bottom Line Personal told you about the launch of an artificial intelligence (AI) program called ChatGPT. Since then, the potential of sophisticated software/hardware systems that instantly generate human-like thought and language has captivated Wall Street and lifted major stock indexes.
For investors nowadays, nothing seems more promising—or perilous—than the potential of AI, which is expected to raise global economic growth by about $7 trillion by 2033. Giant companies like Alphabet and Microsoft are locked in a multibillion-dollar spending war to develop, control and monetize this new technology—and Nvidia, a semiconductor manufacturer best known for its video-game chips, has become one of the planet’s hottest stocks and most valuable businesses.
At the same time, critics are wary about the AI investment frenzy. They remember the painful lessons of another young, transformative technology—the Internet stock bubble in the late 1990s.
To help you if you are vacillating between fears of getting burned and fears of missing out on the next Alphabet or Amazon.com, Bottom Line Personal assembled a panel of five tech investment experts to find out their strategies for getting exposure to AI now, as well as their recommendations for the best AI stocks to buy now….
What our panelists told us: AI investing still is in its very early stages. If it follows the patterns of other tech breakthroughs such as the PC or the Internet, it could take a decade or more to see mainstream adoption. Investors should expect enormous volatility and must be very shrewd about which AI companies are the most likely to translate capital investment in AI into actual profits. The good news: In the next few years, our panelists say there will be several big winners from AI as the phenomenon broadens beyond the “Magnificent Seven” stocks that have benefited so far…
During the California gold rush in the 1850s, the people with the best chance of getting rich weren’t the miners…it was the people selling the mining tools and supplies everyone needed. They won no matter who struck gold. The AI equivalent are companies selling mission-critical equipment needed to design, develop and manufacture increasingly complex semiconductor chips. It’s a less risky way to play the AI chip boom because chip-equipment suppliers have long runways for growth and more reasonable stock valuations. A winning AI pick-and-shovel company…
LAM Research (LCRX) designs and manufactures equipment for thin film deposition, plasma etching and wafer cleaning, processes that take place at an atomic scale and are essential for creating high-bandwidth memory (HBM) chips. HBM chips, made by manufacturers such as Intel and Taiwan Semiconductor, are used in AI data centers because of their ability to process huge amounts of data while keeping power consumption low. They’ll also be needed in the coming boom in AI-enabled smartphones, PCs and smart cars. Recent share price: $75.45.
—Lori Keith, Parnassus Investments
Leading AI companies such as Nvidia haven’t just dominated their market niches—they’ve changed the nature of their industries and built sterling reputations. Two emerging AI blue-chip companies now…
Palantir (PLTR) is the premier AI software contractor for the US Department of Defense and other government militaries around the world. Example: Its software processes raw intelligence in Ukraine from drones, satellites and troops on the ground, then generates AI-enabled models for Ukrainian military commanders. Palantir has pivoted to commercial and corporate markets where the potential for growth is enormous. Note: Palantir’s stock has risen quickly since its inclusion in the S&P 500 index this year. We think the long-awaited breakout has come. The range of $33 to $35 per share should provide a good entry point. Recent share price: $36.46
—Michael Cintolo, Cabot Growth Investor
Recursion Pharmaceuticals (RXRX). Drug development is notoriously expensive and time-consuming. It can take more than a decade and a billion dollars to go from drug discovery to an FDA-approved product on the market. This biotech company speeds up that process by combining AI software and machine learning to design molecules and predict outcomes. That translates into fewer clinical-trial failures and faster, more cost-efficient progression toward commercialization. Recursion, which has already signed drug-development agreements with leading drugmakers such as Bayer and Roche Holdings, has more than 30 drugs in its pipeline including rare-disease therapies and precision oncology treatments. It also plans to license its AI platform to major pharmaceutical firms. Careful: The stock is for aggressive investors because the company is not yet profitable and will not have drug candidates in late-stage clinical trials for two or more years. Recent share price: $6.10.
—Christopher Gannatti, CFA, WisdomTree
It seems like every CEO in the country is promising to implement AI into their business. But some companies are already benefiting from the technology, improving profits, enhancing their competitive advantages, increasing the value they offer their customers and/or opening new avenues of growth. Three sophisticated AI users now…
Axon Enterprises (AXON) is best known for its Tasers, handheld devices for self-defense that deliver electric shocks, as well as a line of body and dashboard cameras for law-enforcement, corrections, military forces and emergency-medical personnel. The company is now building a public-safety operating system of the future by integrating AI-enabled hardware devices and cloud software solutions to reduce gun-related deaths among police and the public. Sales for Axon’s AI product suite have exploded in its most recent quarter, rising 70% year over year. The suite includes automated license-plate reading and Draft One, which writes up the first draft of police reports directly from body-camera recordings. Note: The stock’s share price has surged in recent months—a good thing, with big investors breaking the stock out of a multi-month consolidation. Dips into the $375 area would mark a solid entry point. Recent share price: $399.51.
—Michael Cintolo, Cabot Growth Investor
NRG Energy (NRG). For decades, the demand for power in the US has been flat, and utility companies that produce electricity like NRG Energy had a reputation for steady but slow growth. That has all changed thanks to the enormous energy needs of AI data centers, many of which will be situated in Texas where NRG serves six million customers through coal, gas and oil power generation. Texas also has become a global hub for electricity-hungry Bitcoin miners. The Electric Reliability Council of Texas expects energy demand in the state to almost double in the next six years, which will allow NRG to charge higher prices and boost profits. Recent share price: $92.47.
—Dave Mazza, Roundhill Investments
Samsara (IOT) calls itself an Internet of Things company for the industrial sector. It sets up vast networks of devices including sensors, video cameras and monitoring systems throughout the operations, vehicles and facilities of a business. The devices gather massive amounts of real-time data, then Samsara uses AI software to provide critical insights and derive solutions to improve efficiency and save money. Clients range from Roto Rooter to Coca-Cola to the city of Boston. Recent share price: $46.65.
—Christopher Gannatti, WisdomTree
With the AI market dominated by US tech companies, it’s easy for investors to overlook that it’s a global phenomenon. Comparable companies in emerging markets also are utilizing this new technology—but their stocks often trade at far cheaper valuations. A cheap emerging-markets AI play now…
Alibaba Group Holding (BABA) is China’s version of Amazon.com. It’s the world’s largest e-commerce company, as well as a leader in Internet cloud services. Over the past three years, the slumping Chinese economy has left Alibaba shares deeply out of favor. The stock has fallen 65% since its peak in October, 2021, and the company’s price-to-earnings ratio has shrunk to 12 versus 43 for Amazon.com. To regain its momentum, Alibaba is betting heavily on AI. It has built new high-speed data centers in key markets including Malaysia, Thailand and South Korea, and it is developing local alternatives to popular US applications like ChatGPT. Recent share price: $112.73.
—Dave Mazza, Roundhill Investments
It’s hard to think of a company that has drawn investor obsession more this year than Nvidia, the California semiconductor firm that manufactures graphics processing units (GPUs). These unique silicon chips run billions of calculations per second and are essential to AI applications like ChatGPT and Microsoft’s Copilot as well as to high-powered cloud data centers around the country.
Over the past five years, shares of Nvidia stock soared nearly 3,000%—but those capital gains have also led to outsized market valuations and towering expectations from investors. This past September, fears that Nvidia’s eye-popping earnings growth might not be sustainable triggered the largest one-day decline in US-stock history, a 9.5% plunge generating nearly $300 billion in losses.
My take: Nvidia’s recent stock price of $118 is slightly overvalued versus Morningstar’s fair value estimate of $105/share. In 2025, the stock could have even more upside because I expect revenues to double year-over-year. Even if the US economy slips into a recession, it’s hard to see Nvidia’s customers scaling back their near-term purchases because no one wants to risk letting competitors gain an insurmountable lead in developing AI. Moreover, Nvidia is expanding its product lines and client base. The Nvidia “AI Nations” initiative is working with governments from Europe to Asia to build sovereign AI capabilities.
But beyond 2025, expect much more volatility in Nvidia’s stock. Reason: Greater uncertainty about the spending cycle for AI chips. It may not continue to accelerate as fast if major customers decide to tap the brakes on their massive spending to focus on generating returns from those investments. Also, tech titans ranging from Microsoft to Amazon are developing their own custom in-house semiconductor chips making them less reliant on Nvidia. While there’s little doubt Nvidia will continue to dominate the GPU market, Morningstar expects a compound average annual growth rate of 23% from 2026 to 2028. Still impressive, but some of that rapid expansion may already be priced into the stock.
-Brian Colello, CPA, Morningstar, Inc.
