Best AI stocks to watch in Q1 2024

Artificial Intelligence (AI) could become the latest investing theme of choice — the tech world has seemingly had enough of disruptive tech, cryptocurrency, Web3, Blockchain, and the Metaverse — and is ready to set its hopes on the next big thing.

Of course, while these former concepts are on the backburner as the days of ultraloose monetary policy have ended, AI is becoming the driving force for big tech. Indeed, almost all of the S&P 500’s gains in 2023 have come from just seven companies, all of whom are potentially riding the AI wave to some degree.

There may be a difference between AI and the rest though. Artificial Intelligence is already in use across a wide variety of real-world applications, including in entertainment, social media, art, retail, security, sport analytics, manufacturing, self-driving cars, healthcare, and warehousing alongside dozens of other sectors.

Every Netflix recommendation, every supermarket rewards purchase, and every football match is analysed ever more relentlessly in order to provide more and better data. And while consumers have always understood — even peripherally — that AI was taking over more and more of the heavy lifting; the sector’s investment catalyst has finally arrived.

This catalyst is of course ChatGPT, the OpenAI-developed chatbot which garnered over 1 million users in just five days. It took Facebook 10 months, and Netflix three and a half years to hit the same milestone.

Taking the world by storm, it now boasts over 100 million users, and investors are now considering whether the innovation could make entire careers in areas such as copywriting, accounting, personal training, and even software development entirely redundant.

Whisper it, but some even believe ChatGPT could be instrumental in taking on Google’s dominance in the internet search space.

If this sounds fanciful — and there’s been no shortage of fanciful tech-related claims in the recent past — consider both the pace of technological change over the past 50 years, the hundreds of once vibrant and now abandoned career paths, and the fact that Google itself usurped Yahoo’s search crown.

As previously mentioned, interest rates are rising, and quantitative easing appears all but over for the foreseeable. AI development is exceptionally expensive, and for every ChatGPT breakthrough, there are hundreds of costly failures. Therefore, the best AI stocks could be predominantly the larger blue chips — which also helps to diversify any investment in the event that their AI projects fail.

On the other hand, it's worth noting that the so-called 'magnificent seven' may not be a panacea. The S&P 500 has been falling since the end of July.

And remember, past performance is not an indicator of future returns.

Best AI stocks to watch

1. Microsoft

Microsoft is the original global computing power, so it makes sense that the $2.5 trillion dollar US behemoth tops the list of the best AI stocks to watch. The company already had a strong relationship with OpenAI prior to the ChatGPT launch, and has already invested $10 billion into the company.

This will be a symbiotic relationship — Microsoft will allow OpenAi access to its cloud centres to increase ChatGPT’s computing power, while native search engine Bing has started to incorporate the chatbot into its functions in an attempt to steal Google market share. With OpenAI reportedly planning a $90 billion IPO, Microsoft could also soon see a direct return on its investment.

2. Nvidia

Nvidia is well-known as one of the world’s most valuable chipmakers, used in electronics ranging from smartphones, to cars, to high-end computing. It’s worth noting that Nvidia shares have risen by more than 180% year-to-date to $402, leaving the company with a sky-high price-to-equity ratio of 97.

But their most advanced deep learning chips might mean that the NASDAQ company is still undervalued. They’re already in use at clients such as Alphabet and Facebook owner Meta to power both internal and user facing AI applications.

As AI becomes ever more mainstream, demand for these chips could surge, and importantly, there is a high barrier to entry — Nvidia has a wide economic moat surrounding its market position as the ‘bricks and mortar’ AI choice.

3. Alphabet

Nobody expects Google parent Alphabet to rest on its laurels, despite its current position holding 84% of the global search market share. Even though it recently laying off thousands of employees, it’s launched its own rival — Bard — only to generate an embarrassing mistake at launch.

The chatbot runs on Google’s LaMDA programming, which has been in development since 2021. While there have been accusations of rushing Bard out to compete with ChatGPT, the trillion-dollar company should soon smooth out the issues.

It’s worth noting that AI is already used across many of Google’s current functions. And it’s got at least two more AI-focused projects; its coding-focused Generative Language API, and DeepMind which it acquired in 2014.

4. Tesla

Tesla is the original EV trailblazer, and despite the legal and media troubles of CEO Elon Musk, its advancements in artificial intelligence could see the auto company rise once again to the giddy highs of late 2021. Indeed, its share price has already recovered by 84% year-to-date as it eyes possible expansions in India and Europe.

Fully autonomous driving is the long-term goal, with the company planning to launch a robot taxi service soon. It’s also developing Optimus — a humanoid robot which Musk thinks could become more valuable than Tesla’s auto operations in time. However, economic slowdown in China could cause short-term profitability issues this year.

5. Baidu

Baidu is China’s version of Google, responsible for over 75% of the country’s search market. Like Google, it has a growing cloud business, but it also wants to encroach on Tesla’s territory, with plans to develop the world’s largest autonomous ride-hailing area. The company is already operating this service in multiple Chinese cities, including completely robotic taxis in Beijing, but it’s likewise worth noting the regulatory risks associated with Chinese platform stocks.

Baidu has also developed its answer to ChatGPT and Bard, codenamed ‘Ernie Bot.’ While the March release was a disappointment, the Chinese giant is working hard on getting back into the AI race.

6. C3.ai

Far less well-known, and with a comparatively tiny market cap, C3.ai is in the growth phase of its development. The $2.9 billion company offers customised enterprise AI applications to multiple S&P 500 clients in addition to public sector customers including the US Department of Defence.

Its cutting-edge AI works by using pattern recognition and predictive monitoring tech, and is used by companies including Alphabet, Amazon, and even the likes of oil giant Shell.

Up 122% year-to-date, there could be much further for this company to run as it hits the mainstream investing consciousness - though volatility seems inevitable as investors vie between AI overexhuberance and caution. For context, it's fallen sharply since the end of July.