AI stocks have been the most critical sector in 2023. Early investments in leading chipmakers have provided the most substantial returns. Generative AI is a hot topic as it is highly applicable to business and continues to promise to revolutionize efficiency and costs. That said, the AI ecosystem is much more than chipmakers and generative AI.
Data centers, network providers, and a whole host of other firms across every industry will increase due to the advent of AI. The AI market is worth somewhere north of $200 billion today. It is expected to grow to $1.85 trillion by 2030. Nvidia (NASDAQ:NVDA) will remain in a great position to hold, but so will many other AI ecosystem stocks.
Arm Holdings (ARM)
Arm Holdings (NASDAQ:ARM) is one of those stocks to watch. The company builds highly efficient CPUs. Its computing platforms are the most efficient available. CPUs, like the GPUs Nvidia is known for, are vital to the continued development of artificial intelligence. Their complementary nature is one reason Nvidia made a bid to buy Arm from SoftBank, which ultimately failed in early 2022.
Arm IPO’d in September and has fallen from $63 to $53. Most Wall Street believe that ARM shares are closer in value to their IPO price than their current price, which is a positive sign.
Arm Holdings’ technology and CPUs are in just about every smartphone in existence. They power chip sensors and touch just about everything.
The reason to believe that Arm is about to rise in value is intrinsically related to rates. The Fed is either at or near peak rates currently. Arm is fully priced or at least faces valuation concerns now. If lending becomes cheaper, that will reinvigorate all of the tech sector. Thus, more investors will become aware of Arm overall.
Broadcom (NASDAQ:AVGO) has performed exceptionally well in 2023, rising roughly 50%. Despite its strong performance, the stock is priced at the low end of Wall Street’s targets currently. The company is set to grow over the next decade as it provides popular software used in the semiconductor industry. The semiconductor sector is growing for obvious reasons. As a result, AVGO shares have exploded in 2023. Yet, as mentioned, they’re only expected to grow further and are priced at the low end of Wall Street targets now.
Broadcom isn’t expected to explode upward due to sales growth, though. Revenues increased by 5% in Q3 and should grow similarly between now and the end of 2023. Revenues aren’t expected to explode in 2024 either. Current projections suggest 8% growth next year. This makes it one of those AI ecosystem stocks to buy.
Broadcom is an AI dividend investor’s pick in my mind. The company continues to grow its dividend. Generally speaking, AI and tech don’t provide dividends at all. Broadcom does. It’s going to grow consistently through 2030 while paying ever-growing dividends.
Arista Networks (ANET)
Recent solid results from Arista Networks (NASDAQ:ANET) show why networking firms deserve investor attention about AI. The company is a leader in cloud networking for data centers and campus environments that will continue thriving as AI matures.
Arista Networks’ Q3 results are evidence of that notion. Revenues reached $1.51 billion. That was above the high end of company guidance, which ranged from $1.45 billion to $1.5 billion. It was also above Wall Street expectations for $1.48 billion in sales. The 28.3% year-over-year increase prompted a positive market reaction, sending shares from $175 to above $210.
Networking equipment providers are a less obvious kind of AI firm in which to invest. Nevertheless, the rapid growth of AI requires more outstanding networking capabilities, which has created ample opportunity for Arista Networks and other firms across its industry.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) is similar to Arista Networks. Both stocks benefit from secular trends that make AI ecosystem firms strong investments now and into the future. Cisco Systems is an excellent example of picks-and-shovels investing in the artificial intelligence boom.
That isn’t to say that chipmakers aren’t also great investments in the AI boom. They are. However, Cisco Systems provides the infrastructure upon which AI is being developed, not the chips. Chips were the most obvious beneficiary of the first wave of AI adoption. That’s why AI chipmakers have done so well this year.
Now comes the following less apparent beneficiaries of the AI adoption wave. Capital has cycled out of chipmakers due to excessive valuations. It is seeking its next refuge for AI returns. CSCO stock is slated to be among those firms. Those returns won’t be as pronounced in Cisco Systems as in Nvidia. Investors will get dividend income, though, and steady growth that shouldn’t be ignored.
UiPath (NYSE:PATH) stock represents a firm that utilizes AI in a way that exemplifies what most people imagine when they think of AI. The company sells robotic process automation (RPA) software. It’s software that automates the repetitive tasks that humans perform. High-cost, low-efficiency repetitive tasks are certainly one of the things that pop into my mind when I think of how AI can best be utilized.
UiPath’s AI is more likely to take blue-collar jobs than white-collar ones. I’m not saying that either is more valuable than the other, but I do think that area is significant for investment now. Questions about valuation continue to plague generative AI stocks. UiPath focuses on a different focal area within AI.
The company has robust margins and is low priced, so it’s worth considering now, especially as rates are peaking.
SoundHound (NASDAQ:SOUN) is another AI stock to consider as the focus shifts from generative AI to conversational AI. SoundHound developed the first voice-activated music app and has long been invested in this niche. That area is garnering more attention now, which is precisely why investors should pay attention.
The logic is similar to that I just explained about UiPath: Generative AI stocks have gotten all the attention, and investors are looking for other opportunities. SoundHound is one such example. It’s also a growth stock, which will get much attention soon due to rate expectations.
Revenues increased by 42% during the most recent period, reaching $8.8 million. The firm lost $21.9 million, although those losses did narrow significantly. Most importantly, SOUN is not at risk now and has sufficient liquidity for several years. Growth stocks are coming back into focus, as are conversational AI shares. That combination precisely describes SOUN stock.
Dynatrace (NYSE:DT) is a firm that monitors digital performance and an AI stock that is worth your time as an investor. The company is performing very well of late due to decisions the company made with AI opportunities in mind.
Revenues grew by 25%, reaching $332.9 million, and net income increased by more than 1700% last quarter. Dynatrace acquired Rookout while simultaneously introducing generative AI capabilities. The company has hit its stride at arguably the right time. It doesn’t produce losses, so the Fed’s rate pauses don’t have a particularly profound impact on DT shares. However, you can bet that firms everywhere want to increase digital traceability across their organizations. Dynatrace provides AI-capable offerings that solve those issues. All in all, it’s one of those AI ecosystem stocks to consider.
Whether it explodes immediately or not, Dynatrace is headed in the right direction. There’s a lot of positives to be found within its fundamentals. There’s also an upside remaining in its shares based on target prices.
On the date of publication, Alex Sirois 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.