The artificial intelligence trade shows no signs of cooling off. At least not yet. While some analysts on Wall Street are saying that a bubble has formed in stocks associated with AI, demand for the technology continues to soar and is likely to drive earnings in coming quarters. That said, pretenders have emerged in the AI race and some companies are starting to claim a role in AI that strains credibility.
When social media company Reddit (NYSE:RDDT) claimed to be an AI play during its recent initial public offering, it drew a fair amount of flak online. For investors wanting to get in on the AI bull run, the best thing to do is to bet on companies that have a real and essential role in building AI technologies. Focus on the nuts and bolts of the industry. These are the companies that are likely to both build and benefit from AI over the long haul. They’re also the companies that will still be standing should an AI bubble ultimately burst. Here are three AI stocks to buy.
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) is one of the best ways for investors to play the AI bull run. The company supplies the equipment, coatings and electronic pieces needed to make microchips and semiconductors. In this way, Applied Materials is essential to the entire chip industry that is driving AI applications and models. This fact is reflected in AMAT stock, which has risen 75% over the last 12 months, including a 36% gain in 2024.
AMAT stock jumped 13% higher in a single day after the company announced its latest earnings in February, beating Wall Street forecasts across the board. The company also provided strong forward guidance that was ahead of estimates. Management said that the microchip equipment business will grow faster this year than the semiconductor unit because of the strong demand for advanced chips that power AI applications.
Taiwan Semiconductor Manufacturing Co. (TSM)
Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) is another company that is essential to the global microchip and semiconductor sector and the growth of AI technologies. One could argue that TSMC, as the company is known, is the most important chip and semiconductor company given that it manufactures about three-quarters of all the microchips and semiconductors in the world today.
There is some geopolitical risk with TSM stock as the company behind it is based in Taiwan, a country that China claims as part of its territory. However, TSMC is working to branch out beyond Taiwan. The company recently opened its first microchip plant in Japan and it is also building plants in the U.S. TSMC also issued strong financial results and gave a bullish outlook with its most recent print, sending its stock on a tear.
So far in 2024, TSM stock is up 38%, bringing its 12-month advance to 55%.
Cadence Design Systems (CDNS)
Cadence Design Systems (NASDAQ:CDNS) is another company that helps to form the backbone of the microchip and semiconductor sector that is driving AI advancements forward. The company is a provider of microchip design software that is used to make integrated circuits, systems on chips (SoCs), and circuit boards that are foundational to the entire chip industry. This explains why CDNS stock is up by 21% year-to-date.
Shareholders got a scare when Cadence Design reported its most recent earnings. The stock dropped 9% after the company issued weak guidance for the current first quarter. Management blamed the weak guidance on tough comparisons in its hardware business due to a strong Q1 2023 that resulted from a hardware backlog. However, analysts and investors were quick to look past the short-term guidance and CDNS stock has rallied.
On the date of publication, Joel Baglole held a long position in AMAT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
