Artificial Intelligence Stocks: The 7 Best AI Stocks for 2021
While billions of smartphones, tablets, and laptops are already sold every year, the digital age is just getting started. Smart investors are starting to understand that we’re progressing into the next age of computing that will redefine our digital experience: artificial intelligence.
What exactly is AI? While computers have long been faster at pre-defined commands like multiplying two numbers together, they’ve been unable to handle tasks that humans perform with ease.
Such as driving a car, or understanding spoken language, or even identifying what’s in a picture. However, thanks to breakthroughs in artificial intelligence, this is all changing. Most importantly, AI is making in-roads in nearly every industry across the world. There could be hundreds of companies founded around AI breakthroughs that create fortunes for early investors in the decades to come.
Market research firm Grand View Research predicts the opportunity in artificial intelligence will be massive, growing a mindboggling 46% every year until 2025 on its way to becoming a $390 billion industry.
You might have just learned about artificial intelligence but major tech companies like Apple, Microsoft, and Alphabet (parent company of Google) have been snapping up artificial intelligence companies in a computing arms race for years!
You might be understandably confused about artificial intelligence. Relax, you don’t have to be a Silicon Valley egghead to make money from the next computing revolution but knowing machine versus deep learning is the first step.
- Machine learning is considered the initial step of artificial intelligence when computers perform complex functions based on a set of commands. Machine learning outputs still requires human oversight and modifications.
- Deep learning is considered the next step of automation when computers can select and update their algorithms without human involvement to ensure their outputs are correct. Estimates from ARK Investments put deep learning’s impacts as high as $30 trillion in wealth creation by 2037. For perspective, that would be 50% larger than projected wealth from the Internet!
So, the question on your mind is likely what are the best artificial intelligence stocks to buy today? Below, we’ve rounded up some of our favorite AI stock ideas. From small companies with potentially massive runways to established leaders who could ride AI to new highs, you’ll find plenty of stocks that are riding the AI wave. You might also be interested in an IA ETF (exchange traded fund) which gives you broader exposure to the AI space within a single investment.
The Best Artificial Intelligence Stocks for 2021
These are the 7 best companies that I identified within the AI space with a solid foothold and room for growth.
Microsoft Corporation (Nasdaq: MSFT)
Microsoft benefits two ways from the growth in artificial intelligence, the first is directly by incorporating machine learning AI features into its products, most notably its Microsoft Office work suite, to improve the user experience.
If you’ve used Outlook recently, you might have noticed the improved functionality of Microsoft’s Cortana assistant. Cortana is now able to translate foreign languages and read emails aloud but that’s just scratching the surface of the potential of artificial intelligence. Early last year Microsoft launched AI for Health, and health professionals around the world used its artificial intelligence tools to help fight the pandemic.
However, Microsoft is positioned to benefit from the growth of artificial intelligence even if its own AI user tools don’t move the needle. A recent IDC report predicted there will be 80 zettabytes (a trillion gigabytes) of data by 2025, much of it required for artificial intelligence. Suffice to say, this AI tech will require significant increases in storage and computing functions.
The most economical way to perform these functions is through off-site storage, aka the cloud. As the second-largest public cloud computing provider, Microsoft’s Azure will continue to experience strong growth on the infrastructure side regardless of what AI application the user is engaging utilizing.
Apple Inc. (Nasdaq: AAPL)
Despite having a market cap that exceeds $2 trillion, Apple still has a few tricks up its sleeve. Investors were recently surprised when it was reported the company was still moving forward with plans to bring a self driving car to market.
What does this have to do with artificial intelligence? Well, everything considering deep-learning artificial intelligence technology powers the critical autonomous driving functions. Self-driving technology requires trillions of complex operations per second to ensure riders are safe.
Apple investors don’t have to wait until 2025 to benefit from artificial intelligence. Apple’s digital assistant Siri continues to lead in smartphone voice assistant market share, a feature that has seen daily active users climb by 23% in just two years. Even the facial recognition technology you’ve come to depend on to unlock your phone is powered by AI software.
Apple is also well-positioned to benefit from artificial intelligence growth across the spectrum due to its unique position as iOS App gatekeeper. Apple takes a 30% cut of transactions on its iOS App Store, meaning any AI development breakthroughs in gaming, videos, and social media will immediately be monetizable by Apple.
Amazon.com, Inc. (Nasdaq: AMZN)
It might seem odd that an e-commerce site is among one of the biggest winners from artificial intelligence growth, but as you probably already know, Amazon is not simply a website but a data-collection powerhouse. Every time you make a purchase or even look at a product on its website, there are powerful machine learning algorithms recording and processing your keystrokes.
Amazon has also been one of the most-aggressive at promoting its AI software powered Alexa, placing the technology in everything from speakers to televisions to tablets. For many, their next Amazon purchase is only a few verbal commands away. Although these technologies might seem Orwellian, they improve your shopping experience allowing you to find what you need quickly while continuing to power Amazon’s top-line growth.
Like Microsoft, Amazon’s biggest opportunity might lie in its public-cloud named Amazon Web Services (AWS). As the largest cloud computing provider, this tech giant will benefit from the huge leaps in data storage and compute functions across the board. AWS growth has an added benefit for Amazon investors: because of higher profitability, it provides the bulk of the company’s earnings.
NVIDIA Corporation (Nasdaq: NVDA)
A mistake many beginning investors make is to invest only in the highest-profile and public-facing names to take advantage of growth markets. However, often some of the best investments are the “pick and shovel” plays that provide the critical supporting hardware and software required to power the underlying technology. A powerful example of this was Intel’s and Cisco’s huge returns during the dot-com era.
In the artificial intelligence space, there’s been one true standout in the AI chips needed to process the powerful commands artificial intelligence needs to properly function: NVIDIA Corporation.
The stock has rocketed more than 2,000% in the past five years to become the largest AI chips maker in the world. Still, NVIDIA has the potential for further upside ahead for a number of reasons.
- Software advantages: NVIDIA is much more than just a hardware company. The company’s CUDA software platform has become immensely popular for companies developing their own deep learning models.
- Video games: NVIDIA is the leader in graphical processing units (GPUs). As PC gaming continues to grow in popularity, this has given NVIDIA a powerful tailwind as GPUs are often the most expensive component of high-end PCs.
- Data centers: In the third quarter, NVIDIA’s data center unit grew revenue by an incredible 162%. As AI usage continues to explode in the cloud, NVIDIA will continue to benefit.
- Growth markets: NVIDIA is targeting growth in markets like self-driving cars, edge computing, and robotics.
Lemonade (NYSE: LMND)
Never heard of Lemonade? It’s much smaller than the AI stocks you’ve seen so far on this list. Since its IPO in mid-2020, Lemonade has been impressing Wall Street. Its stock price has risen more than three-fold since the end of October!
Yet, there are reasons to be confident the company’s rise is just getting started. Lemonade is an insurance company that aims to make insurance much faster and easier than competing companies.
That begins with a much easier to use user interface that has AI technology built into its very fabric. Ready to get started with Lemonade? Their chatbot AI Maya will be happy to quickly give you a quote. Have a claim? Their AI Jim bot will handle it in seconds without the need to call in and talk with a representative for potentially hours.
Putting AI algorithms at the center of Lemonade’s business is part of their attempt to bring the industry into the 21st century. Their audience is mostly millennials who are looking for lower-margin coverages like renters insurance, but Lemonade is making a bet those users will continue expanding their relationship with Lemonade over the years.
Estimates for Lemonade’s 2020 sales sit at $93 million, but it’s projected the company will see sales nearly triple to $267 million by 2021. Lemonade’s stock trades at an extremely high multiple today, but its AI-centric approach to insurance just may prove extremely disruptive to this massive industry.
- Read our full Lemonade Insurance review
Upstart (Nasdaq: UPST)
Upstart was only founded in 2012 but is quickly becoming one of the most disruptive companies in the world.
The company operates an AI-powered lending platform. The headline? Upstart says its AI-powered lending leads to a 75% reduction in loss rates and 70% of its loans are fully automated.
Upstart works with a number of bank partners that facilitate their loans. Like Lemonade, Upstart has been able to build new financial platforms from the ground-up that provides a much easier to use experience than the financial portals of many legacy banks.
The big picture is that while Upstart is generating most of its revenue from personal loans today, that market pales in comparison to the size of auto loans or mortgages. Upstart’s growth could be at extremely early stages if it’s able to make inroads into these much larger markets.
While Upstart stock trades at a high valuation, it is already profitable. Wall Street expects this artificial intelligence company revenues to grow from an estimated 220 million in 2020 to $777.7 million in 2024.
- Read our full Upstart Personal Loan review
Cerence (Nasdaq: CRNC)
The car of the future will be very different than what we’re driving today. Thanks to AI, self-driving features are already hitting the market. However, AI software could have impacts on cars far beyond just self-driving.
Cerence is one of the leading AI companies in the race to produce next-generation automobiles. The company works with several Tier 1 automotive giants to produce voice-assisted systems that help keep your focus on the road.
That means if you’re asking your car to steer to the nearest “sub shop,” it’s likely Cerence that’s handling much of the technology in the background to re-route you. However, the company offers a full suite of products. Cerence also offers safety features (such as alerts to ensure your gaze stays on the road) and cloud-services that enable your cars to better work with your smartphones and even smart home.
Today Cerence’s technology is in more than 300 million cars on the road. However, as cars become Internet-connected “computers on wheels” look for its market to substantially expand in the years to come.
Where to Find the Best AI Stocks
While we’ve highlighted 7 of the best AI stocks for 2021, hundreds of companies across the market are harnessing AI to re-think how business is done. If you’re looking for more AI investments in 2021 and the years beyond, here are a few key areas to focus on.
AI has potentially transformative impacts across areas like genomics. For example, AI could be extraordinarily good at spotting patterns in the drug discovery process that help healthcare companies reduce their expenses in the drug discovery process. In addition, AI capability could foster a new era in precision (or personalized) medicine.
Companies such as Illumina (Nasdaq: ILMN) could see major tailwinds from progress in artificial intelligence.
Advancements in self-driving cars could be one of the most exciting areas in 2021. Tesla has begun ‘Beta’ testing of its Full Self-Driving (FSD) software. In addition, last October Alphabet’s (Nasdaq: GOOG, GOOGL) Waymo launched a public, driverless taxi in the Phoenix area.
Beyond Tesla and Waymo, a number of companies could see significant gains from the advent of self-driving cars. These include:
- Baidu (Nasdaq: BIDU): The Chinese tech giant has developed its Apollo self-driving car system. It recently became just the sixth company to receive a fully autonomous testing permit in California.
- General Motors (NYSE: GM): GM’s Cruise subsidiary recently got a vote of confidence from Microsoft, who invested in a “long-term strategic partnership” with the company. Cruise now carries a $30 billion valuation, which makes it worth more than 1/3 of GM’s entire market cap!
Best AI ETFs
Want to invest in the AI revolution without needing to scour the stock market for dozens of companies who are leading the trend? Well, thankfully there are a number of AI-focused ETFs that give traders broad exposure to the space with a single investment.
- ARK Autonomous Technology & Robotics ETF (ARKQ): An ETF that has broad exposure across AI technology. Top holdings include self-driving car companies like Tesla and Baidu, but Ark also includes robotics companies, semiconductor stocks, and even space-focused stocks.
- Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ): An ETF with more of a robotics focus than ARK’s fund. Its top holdings include FANUC, NVIDIA, ABB, Keyence, and Intuitive Surgical.
While many AI ETFs focus on robotics or self-driving cars, don’t forget to zero in on which software companies may see AI transform their business.
- Salesforce.com (Nasdaq: CRM): has built its Einstein AI software into its core software offerings. The addition of Einstein not only improves Salesforce’s software, but it also can be a powerful addition to revenue as AI features are unlocked at higher price points.
- Tencent (OTC: TCEHY): may not be a household name in America, but it features a portfolio of investments in China’s leading AI companies. In addition, Tencent has also waved AI across its software suite.
The Best AI Stocks to Buy on Dips
Finally, with the market seeing more volatility in the first quarter of 2021, we know that many investors are looking to technology stocks that have seen rapid declines. If you’re looking to “buy the dip” on any AI stocks, here are a couple of things to keep in mind:
- Look at the company’s multi-year returns. While a 20% price drop might seem pretty severe today, it may only take a company’s share price back to what it was trading for a couple of months ago.
- Keep in mind that many AI stocks may be more volatile during market sell-offs. Keep position sizes to something you’re comfortable seeing declines that can exceed 30% in short timeframes.
With those couple notes of caution out of the way, here are a few more “opportunistic” stock buys in the AI sector.
- Lemonade: In early March the company fell nearly 50% from its all-time high. Lemonade will remain a high-risk, high-reward stock that will likely see outsized losses in tech sell-offs. However, if you’re intrigued by its long-term potential you can still buy shares well off recent highs.
- Upstart: Like Lemonade, the company sold off after seeing torrid share gains in the first couple months of 2021. With a bright future ahead, today’s stock trading prices could prove to be an attractive entry point for Upstart if it continues delivering 40%+ revenue growth.
- The Trade Desk: This company isn’t on our best AI stocks list above, but is using machine learning to dominate connected TV advertising. It recently sold off, giving investors a more attractive price to invest in a company with a dominant position in a mega-trend that should see high levels of growth in the next five years.
Should You Invest in AI Stocks Right Now?
Our list of the best AI stocks for 2021 included many groundbreaking companies with great potential, but before you start to invest, you may want to hear this.
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The online investing service they’ve run for nearly two decades, Motley Fool Stock Advisor, has beaten the stock market by over 4X. And right now, they think there are 10 stocks that are better buys. Want to learn more? Simply click here to get started.