Nvidia (NASDAQ:NVDA) started the current artificial intelligence boom. Its name alone can bring up smaller AI companies. Investors witnessed this firsthand as AI stocks within Nvidia’s portfolio skyrocketed.
The logic for investors was simple. The company must be a solid pick if Nvidia invests in an AI stock. While investors should do more research into those stocks instead of buying them just because Nvidia did, some AI stocks have great promise.
These are some of the AI stocks Nvidia should buy next. Investors can get a head start instead of waiting for the tech conglomerate to make a move.
Alphabet (GOOG, GOOGL)
Nvidia may want to start its search with a company that it recently surpassed. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has made several missteps in the artificial intelligence race, but those blunders have created a buying opportunity.
The stock trades at a 25 P/E ratio, up 142% over the past five years. The recent pullback indicates investors are ignoring the vast potential of the company’s advertising network and cloud platform.
While the underlying business is enough to generate more gains, Alphabet is still heavily invested in artificial intelligence. The company has time to right the ship, and the current valuation offers a good margin of safety. Alphabet’s financials are strong based on the company’s fourth-quarter results.
During that quarter, revenue increased by 13% year-over-year while net income increased by 52% year-over-year. During the press release, Alphabet CEO Sundar Pichai mentioned that Google Search, YouTube and Cloud benefit from the company’s AI investments. Alphabet will get over the bumps in the road and still has an excellent business model.
Cadence Design Systems (CDNS)
Cadence Design Systems (NASDAQ:CDNS) has steadily outperformed the market. Shares are up by 64% over the past year and have gained 433% over the past five years. The company is harnessing generative AI to transform product design and recently announced the first generative AI technology that automatically identifies and addresses EM-IR violations. The technology helps make the product design process more efficient.
The company’s fourth-quarter results indicate a rising market share. Cadence generated $1.069 billion in revenue compared to $900 million in Q4 2022. That’s an 18.8% year-over-year increase. Net income increased by 34.7% year-over-year, which resulted in a 30.3% net profit margin.
The company has exposure to artificial intelligence and is releasing its own solutions. Meanwhile, it has healthy, growing financials with plenty of runways. Shares currently trade at a 51.5 forward P/E ratio. The stock is up by 20% year-to-date and AI tailwinds can bring it higher.
Palantir (PLTR)
Palantir (NYSE:PLTR) has enjoyed a resurgence. The stock has more than tripled over the past year as the company reports solid growth and profit margin expansion.
Palantir’s big data analytics use artificial intelligence to offer a better user experience. The company has won many government contracts and recently expanded to private businesses.
The combination of government and private business clients worked well for the company. Palantir achieved GAAP profitability for the 5th consecutive quarter. That wasn’t the only highlight from the Q4 2023 earnings report. Revenue increased by 19.6% year-over-year while net income more than tripled year-over-year.
Customer count grew by 35% year-over-year, largely fueled by private businesses. Government revenue grew by 11% year-over-year, while U.S. commercial revenue increased by 70% year-over-year. A growing customer base and top-tier software can help Palantir march higher.
Shares trade at a 79 forward P/E ratio, which may be high for some value investors. However, Nvidia hasn’t shown much preference for buying stocks based on their valuations so this pick would make sense for the company’s portfolio.
On this date of publication, Marc Guberti held a long position in GOOG. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
