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2 Reliable AI Stocks

Motley Fool - Thu Nov 16, 2023

In the fast-paced world of artificial intelligence (AI) stocks, dependable growth companies are like rare gems. Some recommendations in 2023 have already showcased this, yielding impressive results.

Fool.com contributors highlighted many promising AI picks in January, going far beyond the surface of the technology storm that started when OpenAI introduced the ChatGPT service. For example, business process automator C3.ai has gained 177% since Anthony DiPizio recommended it on Jan. 3. Chris Neiger suggestedAmazon one week later and has been rewarded with a 59% price increase -- so far. My own vote for the AI-flavored collaboration tools of Atlassian on Jan. 4 has also scored a 50% return. All of these winners have outpaced the S&P 500 market index over the same periods.

The key takeaway? Quality companies often excel both in the short term and the long run. In this spirit, let's check out two top-notch AI contenders: Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) and IBM(NYSE: IBM). These companies aren't just riding the AI wave; they're defining it.

And the best part? These stocks didn't soar to unreasonable heights in this year's AI craze. Hence, their current market prices present a great opportunity for investors looking to add not just exciting growth, but also reasonable value to their portfolios.

So let's check out this handful of AI titans that don't come with astronomical share prices today. These innovators are truly the cream of the crop, and some of the best investing ideas in today's market.

Alphabet: The "Google of AI"

You know you've made it big when your company name becomes a popular metaphor for the entire industry you work in. Google entered the dictionaries nearly two decades ago as a verb referring to searching for something on the internet. Nowadays, people also use the word to suggest that somebody is utterly dominating something -- the way Google rules the online search and advertising markets.

So, who will be the "Google of AI?" In my opinion, there's a good chance that this coveted title will fall to Google and its parent company, Alphabet.

I'm not talking about Google Bard, which feels like a low-quality version of ChatGPT so far. Toeing the line between powerful AI services and protection of intellectual properties, Google's approach has been much more cautious than OpenAI's. So the Bard experiment is not a particularly helpful gauge of Alphabet's long-term AI prospects.

But the company has been building AI smarts into its public services for years, including deep learning systems behind the route-finding functions of Google Maps and the neural-network version of Google Translate. That effort can only be accelerating behind the scenes. Next-generation growth initiatives like the Waymo self-driving car business and the Verily life sciences segment rely heavily on AI. Moreover, the Google Cloud platform is one of the largest providers of computing power for large-scale projects -- such as training and running a high-power AI system. If a smaller player emerges as the next big thing in AI, Google may very well play an important part in how that unheard-of upstart runs its services.

It's not a guaranteed slam-dunk win, of course. Other tech giants are leaning into the AI opportunity, too, armed with similar arrays of computing infrastructure and top-notch researchers. But Alphabet was built for flexibility, and the reliance on AI runs deep in this company's culture. I don't have to pick one winner in the race to become "the Google of AI," but the original Big G is a natural contender for the throne.

Alphabet's stock is up by 52% in 2023, but it also fell hard in the inflation-inspired flight from growth stocks last year. In a two-year perspective, the two stock classes are down by approximately 9% while the S&P 500 index has fallen by a milder 4%. So I don't see an overvalued rocket ride here, just an AI-boosted return to normality. All in all, Alphabet's stock is a rock-solid investment for the long term and the company will probably enjoy many benefits from the artificial intelligence sea change.

IBM: The enterprise AI leader

If Alphabet has a long history of AI innovation, IBM is like the wise old mentor who brought the new kid up to speed. Remember the first time a chess computer was able to beat the human world champion, Garry Kasparov? IBM made that magic moment happen -- way back in 1996 -- with the innovative Deep Blue system.

Deep Blue was hardly IBM's first foray into AI research, but it delivered a public spectacle of game-changing proportions. Many of the AI researchers driving the science forward today were surely inspired by the Deep Blue victory as kids, or in college, or on the verge of a career change.

And Big Blue's own research didn't stop there. The company is one of the world's most productive developers of technology patents per year.

That won't change anytime soon. IBM CEO Arvind Krishna has said he runs the company with "a maniacal focus on our open hybrid cloud platform and AI capabilities." In other words, AI is an absolutely essential piece of Krishna's strategy, and you'll find the Watson AI engine looming over every nook and cranny of this giant enterprise.

IBM is happy to leave consumer-facing products to other companies, keeping a laser-like focus on business-to-business services instead. That's a smart way to carve out a specific niche within the larger AI opportunity, and I fully expect IBM to remain a leader in this area for years to come.

Big Blue's juicy AI prospects have not inspired investors yet, though. The stock has only gained 8% year to date. It should be said that IBM held up better than most tech giants in the 2022 inferno, and share prices are up by 28% in two years. But this stock was never expensive to begin with, and it trades at just 11.5 times free cash flow and 2.3 times sales today. IBM is a bargain-bin find, even without the game-changing power of the AI boom.

Alphabet and IBM represent two distinct but equally compelling facets of the AI revolution. Alphabet, with its broad-reaching applications and innovative drive, and IBM, a stalwart in enterprise AI with a legacy of groundbreaking advancements, both offer unique opportunities for investors.

As AI continues to shape our world, keeping an eye on these leaders in the space could prove invaluable for those looking to invest not just in technology, but in the future itself. And both stocks are inexpensive bets on the AI opportunity today.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Alphabet, Amazon, and International Business Machines. The Motley Fool has positions in and recommends Alphabet, Amazon, and Atlassian. The Motley Fool recommends C3.ai and International Business Machines. The Motley Fool has a disclosure policy.

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