While artificial intelligence appears to be all the rage these days, investors may want to target a specific subsegment called generative AI stocks. According to McKinsey & Company, generative AI describes algorithms that can be used to create new content. These include audio, code, images, text, simulations, and videos. Another reason to consider bidding up generative AI companies to buy is the underlying lucrative market opportunity.
Per Grand View Research, this market may expand at a compound annual growth rate (CAGR) of 35.6% from 2023 to 2030, culminating in a valuation of $109.37 billion. Thus, you’ll be seeing quite a bit about generative AI stocks in 2023.
As with anything, you’ll want to conduct your own due diligence before moving forward. Nevertheless, these ideas for best generation AI stocks should lead you on the right path.
An all-around tech juggernaut, Microsoft (NASDAQ:MSFT) makes for a viable opportunity in arguably most circumstances. Unsurprisingly, MSFT rates highly as one of the best generative AI stocks. Thanks to its partnership with OpenAI – the enterprise that brought to you ChatGPT – the software and hardware giant reinvigorated life into previously moribund units, such as its Bing search engine.
Financially, Microsoft easily ranks among the top generative AI companies. Primarily, the company delivers excellent operational stats. Its three-year revenue growth rate pings at 17.4%, outpacing 71.6% of firms listed in the software industry. Also, its free cash flow (FCF) growth rate during the same period is 20.5%, above 64.8% of its peers.
As well, the enterprise enjoys a robust bottom line. Its net margin impresses at 33.25%. Also, Microsoft features a return on equity (ROE) of 39.18%, indicating extremely high business quality. Plus, Wall Street analysts love it, pegging MSFT a consensus strong buy.
Alphabet (GOOG, GOOGL)
One of the global tech stalwarts, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has aggressively moved into the digital intelligence space, seeking to become one of the best generative AI stocks. During the company’s first-quarter 2023 earnings call, CEO Sundar Pichai remarked that Google’s generative AI features have made content creation and collaboration easier for its enterprise-level clients.
Another factor that should swing the needle for GOOG as one of the best ideas for generative AI investing is its financials. Despite some struggles in the charts recently, Alphabet can hold its own operationally. For example, its three-year revenue growth rate comes in at 22.9%, above 75.73% of companies listed in the interactive media space.
On the bottom line, Alphabet features a net margin of 20.58%, ranked better than 83.3% of its peers. Also, its ROE pings at 22.88%, above 83.97%. Notably, analysts peg GOOG as a unanimous strong buy. Their average price target lands at $124.13, implying nearly 15% upside potential.
While long-suffering criticisms for its rising irrelevance, legacy tech stalwart IBM (NYSE:IBM) proves an old dog can still learn new tricks. During the company’s Q1 conference call, management acknowledged that its technology undergirded the AI-powered commentary on videos in the Masters’ Tournament golf app, per a CNBC report. Therefore, IBM may have a leg up on this new digital intelligence, making it one of the generative AI companies to consider.
Financially, IBM doesn’t hold a candle to the top two generative AI stocks, if I may be honest. For instance, its balance sheet could use some work. As well, its three-year revenue growth rate of 0.9% is lackluster, to put it diplomatically.
However, it has decent stats on the bottom line. In particular, its operating margin pings at 13.46%, above almost 80% of the field. As well, it’s consistently posting net income, sparking confidence in its strong dividend yield of over 5%.
A top-tier enterprise for creatives, Adobe (NASDAQ:ADBE) also deserves the label as one of the best generative AI stocks. According to its website, Adobe brands the underlying digital intelligence as ushering in a new era of productivity. Specifically, the company launched its Firefly initiative, which allows graphic designers to make an infinite range of creations.
On the financial front, Adobe brings much confidence to the table. First, it enjoys stability in the balance sheet, particularly with an Altman Z-Score of 11.04 which indicates high fiscal resilience and low bankruptcy risk. Operationally, its three-year revenue growth rate rings up the register at 18.1%, outflanking 72.79% of its software peers.
On the bottom line, its net margin impresses at 26.32%. Also, it prints a lofty ROE of 33.65%. If that wasn’t enough to get you interested, ADBE could also be undervalued. Currently, the market prices shares at 0.69 times discounted cash flow (DCF). In contrast, the sector median pings at 1.1 times.
Of course, the best generative AI stocks don’t exclusively hail from the U.S. If you want to expand your horizons, you may consider Baidu (NASDAQ:BIDU). A Chinese multinational tech giant, Baidu introduced ERNIE Bot earlier this year. A groundbreaking innovation, ERNIE is a knowledge-enhanced large language model (LLM) that comprehends human intentions. From there, it delivers accurate, logical, and fluent responses approaching the human level.
It just proves that you’ll want to strongly consider generative AI companies because their products may replace us – at least in specific job functions. On the financial front, Baidu is a bit of a mixed bag. While it features a solid net margin of 5.98% (beating out 63.37% of the field), its three-year revenue growth rate of 4.8% disappoints.
However, one major positive centers on the value proposition. Presently, the market prices BIDU at a forward multiple of 13.18. As a discount to projected earnings, Baidu ranks better than 78.26% of companies listed in the interactive media industry.
Known for its tax-preparation software, Intuit (NASDAQ:INTU) enjoys an extremely relevant profile, particularly for the gig economy as I’ve argued. However, INTU also ranks as one of the best generative AI stocks to buy. Specifically, the company announced Mailchimp, which leverages generative AI to help marketers and small businesses create email campaigns. Fundamentally, Mailchimp could be a game-changer for startups, which may be short on resources.
Onto the financials, Intuit delivers an overall solid canvas. First, its three-year revenue growth rate comes out to 20.4%, above 76% of its software rivals. Notably, its book growth rate during the same period pings at a very lofty 59.4%, above 89.13% of sector players.
On the bottom line, Intuit delivers operating and net margins of 19.48% and 14.22%, respectively. Both stats rate better than at least 85% of the competition. Also, its ROE hits 12%, beating out nearly 72%.
An audio and speech recognition company, SoundHound (NASDAQ:SOUN) garnered intense interest among speculators. Since the start of the year, SOUN shot up slightly over 103%. However, it’s possible that it could still move higher. Thus, it’s one of the generative AI stocks to consider if you’re the gambling type.
Primarily, market observers love the potential behind its voice assistance platform. Through its chatbot system, users simply state what they want, may add follow-up questions, and receive fast, accurate, up-to-date responses. Basically, it’s a Google search but for the current century.
That said, you’re going to need plenty of confidence, conviction, and patience to deal with SOUN stock. For instance, the company’s balance sheet is complete junk (another word would fit more appropriately here). Unsurprisingly, its profit margins sit deeply in negative territory. However, Cantor Fitzgerald’s Brett Knoblauch pegs SOUN a buy. Also, the analysts see shares hitting $3.20, implying over 20% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.