Artificial intelligence technology, for all the people talking about it, is still in its early stages. While a handful of tech names seem to dominate the space currently, investors looking to invest in AI may be wondering which companies are likely to do better as the field evolves.
Other investors are clearly eager to jump in right now. Excitement around the possibilities in AI had helped AI stocks pull ahead of the market in the first half of 2024, and a lull in the summer has been followed by an autumn rebound. The Morningstar Global Next Generation Artificial Intelligence Index has returned 35.55% for the year to date, versus 25.56% for the broad-based Morningstar US Market Index as of Nov. 14.
Best AI Stocks to Buy Now
To find the best AI stocks, we look to the Morningstar Global Next Generation Artificial Intelligence Index. The AI stocks on this list are among the index’s top constituents, and they all earn Morningstar Ratings of 4 or 5 stars, as of Nov. 14, 2024, which means they’re undervalued.
• Microsoft MSFT
• Alphabet GOOG
• Taiwan Semiconductor Manufacturing TSM
• Adobe ADBE
• Snowflake SNOW
• Cognizant Technology Solutions CTSH
• Baidu BIDU
• Dassault Systemes DASTY
• Okta OKTA
• UiPath PATH
Here’s a little more about each of the best AI stocks to buy, including commentary from the Morningstar analyst who covers the stock. All data is as of Nov. 14, 2024.
Microsoft
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Software—Infrastructure
Microsoft starts off our list of the best AI stocks to buy now. The software and cloud provider has established a leading AI portfolio with offerings like OpenAI, which is home to ChatGPT. Earlier this year we raised our revenue growth estimates and profitability assumptions for Microsoft based on consistent performance and a solid outlook. This AI stock is priced at a discount to our fair value estimate of $490.
“Microsoft is one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Based on its investment in OpenAI, the company has also emerged as a leader in AI. Microsoft has also enjoyed great success in upselling users on higher-priced Office 365 versions, notably to include advanced telephony features. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins and deepening ties with customers.
“We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $75 billion business, it grew at an impressive 30% rate in fiscal 2024. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud, creating seamless hybrid cloud environments. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touchpoint for an Azure move. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes.
“Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power platform, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.”
Dan Romanoff, Morningstar senior analyst
Read more about Microsoft here.
Alphabet
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Internet Content & Information
Alphabet is a holding company that wholly owns internet giant Google, and Google services account for nearly 90% of Alphabet’s revenue. We consider Google an AI front-runner, and its investments in AI are a continuation of the effort to safeguard its core product, Google Search. By leveraging generative AI, Google can improve both its own search quality and its advertising business. Google’s own generative AI offerings, such as Gemini, can avert any major customer/advertiser churn. This cheap AI stock trades below our fair value estimate of $220.
“We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true technology behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals including search, artificial intelligence, video, and cloud computing.
“Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.
“We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.
“On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.
“Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.”
Malik Ahmed Khan, Morningstar analyst
Read more about Alphabet here.
Taiwan Semiconductor Manufacturing
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Semiconductors
“Taiwan Semiconductor Manufacturing is the only name from the semiconductor industry on our list of the best AI stocks. The world’s largest dedicated chip foundry, Taiwan Semiconductor commands more than 60% market share, and high-performance computing is its largest growth driver. Increasing in-house design of cloud computing and AI chips by US and Chinese internet giants should benefit Taiwan Semiconductor for the next few years. The stock of this wide-moat semiconductor company is trading 13% below our fair value estimate of $215.
“Taiwan Semiconductor Manufacturing is the world’s largest dedicated contract chip manufacturer, or foundry, with over 60% market share. It makes integrated circuits for customers based on their proprietary IC designs. TSMC has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. Like all foundries, it assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.
“The rise of fabless semiconductor firms has been maintaining the growth of foundries, which has in turn encouraged increased competition. However, most of these newer competitors are confined to low-end manufacturing due to prohibitive costs and engineering know-how associated with leading-edge technology. To prolong the excess returns enabled by leading-edge process technology, or nodes, TSMC initially focuses on logic products, mostly used on central processing units and mobile chips, then focuses on more cost-conscious applications. This strategy has been successful, illustrated by the fact that the firm is one of the two foundries still possessing leading-edge nodes when dozens of peers lagged.
“We note two long-term growth factors for TSMC. First, the consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced nodes. Second, organic growth of artificial intelligence, Internet of Things, and high-performance computing applications may last for decades. AI and HPC play a central role in quickly processing human and machine inputs to solve complex problems like autonomous driving and language processing, which accentuated the need for more energy-efficient chips. Cheaper semiconductors have made integrating sensors, controllers, and motors to improve home, office, and factory efficiency possible.”
Phelix Lee, Morningstar analyst
Read more about Taiwan Semiconductor here.
Adobe
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Software—Infrastructure
“Next on our list of the best AI stocks to buy now, Adobe trades 17% below our fair value estimate of $635. Adobe lays claim to the go-to software products that creative professionals rely on, such as Photoshop, Illustrator, and InDesign, and we think it has carved out a wide economic moat around its business. The 2023 introduction of AI solution Firefly should also attract new users to Adobe solutions.
“Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.
“CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento, Marketo, and Workfront acquisitions, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.
“The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company; it is now a $2.8 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce, has made a file format that is usable on any screen more relevant than ever.
“Adobe believes it is attacking an addressable market well in excess of $200 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher-price-point solutions, and cross-sell digital media offerings.”
Dan Romanoff, Morningstar senior analyst
Snowflake
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High
• Industry: Software—Application
“We think Snowflake, already a major data lake, warehousing, and sharing company, has more opportunities for growth ahead. Its data lake and data warehouse combination, which is used to create insights from AI and Big Analytics, can be deployed on various public clouds, thus providing value to its customers. The stock of this no-moat software company is trading 31% below our fair value estimate of $187.
“In just over 10 years, Snowflake has culminated into a force that is far from melting. As enterprises continue to migrate workloads to the public cloud, significant obstacles have arisen, including hefty data transformation costs, breaking down data silos to create a single source of truth, and creating scalable performance. Snowflake seeks to address these issues with its platform, which gives its users access to its data lake, warehouse, and marketplace on various public clouds. We think Snowflake has a massive runway for future growth and should emerge as a data powerhouse in the years ahead.
“Traditionally, data has been recorded in and accessed via databases. Yet, the rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse can do this but still does not meet all public cloud data needs—particularly, in creating artificial intelligence insights. Data lakes solve this problem by storing raw data that is ingested into AI models to create insights. These insights are housed in a data warehouse to be easily queried. Snowflake offers a data lake and warehouse platform, which cuts out significant costs of ownership for enterprises. Even more valuable, in our view, is that Snowflake’s platform is interoperable on numerous public clouds. This allows workloads to be performed without significant effort to convert data lake and warehouse architectures to work on different public clouds.
“We think that the amount of data collected and analytical computations on such data in the cloud will continue to dramatically increase. These trends should increase usage of Snowflake’s platform in the years to come, which will, in turn, strengthen Snowflake’s stickiness and compound the benefits of its network effect. While today Snowflake benefits from being unique in its multicloud platform strategy, it’s possible that new entrants or even public cloud service providers will encroach more on the company’s offerings. Nonetheless, we think that Snowflake is well-equipped with a fair head start that will keep the company in best-of-breed territory for the long run.”
Julie Bhusal Sharma, Morningstar analyst; Eric Compton, Morningstar director
Read more about Snowflake here.
Cognizant Technology Solutions
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
• Industry: Information Technology Services
“Cognizant Technology Solutions is the first narrow-moat company on our list of the best AI stocks to buy. This global IT services provider is 14% undervalued relative to our $94 fair value estimate. We think Cognizant will benefit considerably from demand in digital transformation projects, and AI enablement remains strong. We anticipate that IT servicers like Cognizant will be enablers of enterprise AI, as firms look for experts in this domain to ensure proper AI use and integration.
“Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don’t see Cognizant returning to that level of growth in the future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.
“Cognizant has admitted that it is first and foremost perceived as a back-office enterprise outsourcer, but we think its existing technical capabilities are strong in more-nuanced enterprise IT solutions, such as artificial intelligence services, which will help it become better known for digital transformation. While Cognizant has not lagged in its digital capabilities, we think there’s more work to be done for the company to distinguish itself from competitors as a cutting-edge IT service provider. We believe Cognizant is well aware of this potential and has a healthy balance sheet to push forward in its technical capabilities. Still, a pipeline of work from in-house consultants could help bring down the costly activity of highlighting one’s technical capabilities.
“For these reasons, we think Cognizant’s slow entrance into traditional consulting will be a worthy cause in the long run. Despite historical reluctance to enter consulting more meaningfully and offer cloud solutions, we think Cognizant has already turned a corner. We believe Cognizant is on sound footing, like its key peers, to benefit from strong digital transformation trends.”
Julie Bhusal Sharma, Morningstar analyst; Malik Ahmed Khan, Morningstar analyst
Read more about Cognizant here.
Baidu
• Morningstar Rating: 5 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Internet Content & Information
“Baidu is the largest internet search engine in China and is pursuing major growth initiatives in AI, video streaming, voice recognition technology, and autonomous driving. We see Baidu’s AI development and emerging technologies as valuable intangible assets but assess these businesses to have narrow moats. This cheap AI stock is 46% undervalued relative to our fair value estimate of $157.
“Baidu’s online advertising business accounted for 72% of Core revenue in 2023 and will be the main source of revenue in the medium term given its dominant market share for search engines, but we believe unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China’s AI development, but whether Ernie will be the long-term leader will depend on execution as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.
“While Baidu is transforming its identity by investing in generative AI, cloud, and autonomous driving, commercialized success remains to be seen. There are encouraging signs of its AI cloud monetization growing to 18% of core revenue in 2023 from 12% in 2020. However, despite sharp growth, we expect Baidu to face competition in the cloud from industry leaders Alibaba, Huawei and Tencent, which all have greater market share than Baidu. Despite a potential total addressable market for autonomous driving that is 9 times its online advertising per management, commercial success is highly uncertain as revenue remains immaterial, and mass scale adoption or time-to-market are unclear.
“Its streaming video service, iQiyi, continues to be a margin drag on Baidu’s business due to a high content cost. The business constantly needs to develop or acquire new content to prevent customer churn. We’re less confident of its outlook than the Core product due to a low barrier to entry and numerous competitors. Membership has remained stagnant at 100 million subscribers for the last five quarters and therefore, we believe long-term growth is limited.”
Kai Wang, Morningstar senior analyst
Dassault Systemes
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Software—Application
“Dassault Systemes is a new addition to our AI stocks list this month. The company provides computer-assisted design and product lifecycle management software to customers like Boeing and Tesla. This cheap AI stock is trading 15% below our fair value estimate of $40.
“Dassault Systèmes has a hold on the computer-assisted design software market for autos, aerospace and defense, and manufacturing. With 90% of all aircraft and 80% of all autos globally made via Dassault software, we believe the company will stay well entrenched with engineering teams with help from its significant switching costs and network effect found in its midmarket CAD software, SolidWorks. In our view, the wide-moat company has adapted well to new trends in its market exposures, such as electric vehicle design software, which has made us more confident in the longevity of its moat and ability to achieve excess returns on invested capital.
“Outside of CAD offerings like Catia and SolidWorks, Dassault has a hefty portfolio of information intelligence, collaboration, content sharing, and simulation software, which all work to serve a part of product production, whether it’s drug research and development, mining planning, or clothing line organization. The most popular of these disparate offerings is Enovia, its product lifecycle management software, which is used in a variety of industries to connect engineers, marketing, and supply chain teams to better orchestrate the lifecycle of a product.
“Dassault has the greatest share of the PLM market, and this exposure is responsible for nearly half of the company’s $100 billion addressable market. While there are new entrants in the PLM and midmarket CAD spaces, we think that Dassault will be able to work to minimize any additional share that new players would take in its markets by increasing its adoption of its 3DExperience platform. The platform seeks to connect much of Dassault’s offerings in one place. We think that over the next two years, Dassault will be able to significantly increase its platform revenue. With a greater portion of customers on the platform, we would not be surprised to see customer churn come down and switching costs increase as the platform helps to lock in the benefits of using all Dassault software, which used to be more disparate.”
Julie Bhusal Sharma, Morningstar analyst
Okta
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High
• Industry: Software—Infrastructure
While we think that Okta’s underlying business benefits from high customer switching costs associated with its products and a network effect associated with the firm’s integration network, the company has been unable to carve out an economic moat because of its hefty spending on sales and marketing. Okta is a cheap AI stock that trades 23% beneath our $100 fair value estimate.
“We believe Okta is poised for long-term success as a leader in the identity and access management space. Okta’s Identity Cloud, which weaves together the firm’s workforce and customer offerings, stands to grow in importance to its clients as zero-trust security infrastructures, digital transformations, and cloud migrations increase the company’s value proposition. However, we assign Okta with a no-moat rating as we don’t foresee excess returns on capital in the next few years. Yet, we believe the firm’s platform, impressive number of integrations, and a broad range of SKUs have allowed the business to be on the cusp of generating high customer switching costs and a network effect.
“Okta targets two markets through its workforce identity and customer identity offerings. Okta’s workforce offerings enable a company’s employees to securely access its cloud-based and on-premises resources. The firm’s customer offerings allow its clients’ customers to securely access the client’s applications, such as a shopping cart on a website. We project continued demand for Okta’s products as the shift to zero-trust security infrastructures and digital transformations continue unabated.
“While the IAM space remains competitive, we think Okta’s strategy of investing heavily in its sales and research divisions is sound. In doing so, the firm can maximize its value to its customers that it can land and subsequently expand.
“Along with Okta swiftly increasing its customer base, the firm has also increased its enterprise penetration by landing larger clients, which are often stickier than smaller ones. We also believe larger clients provide Okta with more avenues to upsell as their digital resources are far greater in quantum than their smaller counterparts. Finally, we think that while Okta has made inroads with large enterprises in the US, the firm has attractive growth opportunities with large enterprises in the international markets.”
Malik Ahmed Khan, Morningstar analyst
UiPath
• Morningstar Rating: 4 Stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High
• Industry: Software—Infrastructure
Our list of the best AI stocks to buy now closes with UiPath. This narrow-moat company specializes in automation software for applications such as claims processing, employee onboarding, invoice to cash, loan applications, and customer service. We think this AI stock is 23% undervalued compared with our fair value estimate of $16.50.
“UiPath offers end-to-end cross-application process automation software. It deploys a combination of automation technologies including robotic process automation, application programming interface, artificial intelligence, and low-code/no-code functionality to automate complex, multistep processes. UiPath’s core RPA technology boasts leading market share by revenue and has garnered accolades from industry analysts for superior product functionality and strategy.
“The UiPath Business Automation Platform uncovers automation opportunities in customer’s workflows via sophisticated tools including process, task, and communication mining. Once a process is identified as ripe for automation, software developers and business users establish rules, triggers, and processes that run either on command or continuously without human intervention. These processes can include automation to open and log into software, extract data from documents, move folders, fill in forms, update information fields and databases, and read and generate written communication. Lastly, the platform supports analytics, governance, and testing of automated processes at scale.
“We expect UiPath to continue to execute a successful land-and-expand strategy as customers uncover further automation opportunities and adopt a broader set of platform functionality. UiPath’s offering delivers meaningful cost savings, efficiency, and risk-management benefits to customers looking to automate repetitive processes traditionally executed manually by humans. Automating such tasks allows customers to reduce resource intensity, redirect resources to higher-value tasks, and support business growth. Examples of repetitive tasks primed for automation include insurance claims processing, invoice and order processing, employee recruitment and onboarding, loan applications, and customer service and support, such as password resets or scheduling appointments. In addition, advancements in AI are supporting automation of more complex and cognitive tasks, such as those with greater variability and unstructured data.”
Dan Romanoff, Morningstar senior analyst
What Is the Morningstar Global Next Generation Artificial Intelligence Index?
The Morningstar Global Next Generation Artificial Intelligence Index provides exposure to leading-edge AI technologies, including generative AI and adjacent products and services,
The index derives its constituents from the Morningstar Global Markets Index, which represents 97% of the investable market capitalization of developed and emerging markets globally. Companies must be covered by Morningstar’s equity research analysts and have a score of 1 or higher for at least one of the defined subthemes to be eligible for index inclusion.
The four subthemes, as identified by The Morningstar Equity Research Next Generation Artificial Intelligence Committee, are:
Generative AI: This involves the creation of original content. Large language models, such as ChatGPT, are a type of Generative AI model that focuses on producing humanlike text.
AI Data and Infrastructure: This encompasses the various technological components needed to manufacture, design, maintain, host, support, and improve AI models. These include semiconductors and data center infrastructure.
AI Software: This includes enterprise and consumer software that incorporate AI models to enhance the user experience and/or improve efficiency.
AI Services: This includes consultancies and outsourced business process companies, which may aid businesses in implementing AI.
Through a standardized scoring process conducted by Morningstar equity analysts, companies are assigned thematic exposure scores for each subtheme. Companies ranked in the top 50 are eligible for inclusion. The index constituents are weighted by float-adjusted market capitalization. However, the weightings are adjusted, if necessary, to ensure at least 80% of the index is allocated to stocks with meaningful exposure to generative AI. The index is rebalanced quarterly and reconstituted annually.
Read more about The Morningstar Global Next Generation Artificial Intelligence Index.
The Best AI Stocks: More Ideas to Consider
Investors who would like to extend their search for the top AI stocks can do the following:
• Review the holdings of the Morningstar Global Next Generation Artificial Intelligence Index to investigate further.
• Stay up to date on the tech sector’s performance, key earnings reports, and more with Morningstar’s technology sector page.
• Use the Morningstar Investor screener to build a short list of AI stocks to research and watch.
• Read the latest news about notable AI stocks from senior Morningstar technology analyst Dan Romanoff.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
