The market has become more volatile amid concerns about a possible recession.
Recessions, or periods when the economy is shrinking, are not fun. Unemployment rises and stock or house prices fall, sometimes sharply. It can be scary. Buying stocks during a recession will likely go against every primal emotion you have.
However, history has shown time and again that recessions are great long-term buying opportunities. As Warren Buffett said, “Be greedy when others are fearful.”
Here are three top AI stocks that have started to reverse their massive gains and could be fantastic targets if market volatility continues.
1.Broadcom
Nvidia makes the most headlines among semiconductor companies, but Broadcom (NASDAQ: AVGO) is a rock star that long-term investors would be wise to focus on. The company sells a mix of semiconductors and software used in end markets related to networking, cloud and wireless technologies. Revenue is split roughly 60/40 between chips and software, which helps diversify the company. The stock is a market beater that has outperformed the S&P 500 this decade with a landslide.
Financially, Broadcom is a behemoth. The company generates over $42 billion in annual revenue, of which over 40% is free cash flow. Broadcom management returns money to shareholders via dividends. The dividend has increased for 15 years in a row, with a whopping 36% annual growth over the past decade. Investors should continue to see plenty of double-digit dividend growth going forward. The company is still growing, and the dividend only costs 50% of cash flow.
Artificial intelligence (AI) should only add to Broadcom’s existing growth. About 35% of Broadcom’s expected 2024 chip revenue will go to AI, and there has been recent talk of building a custom chip for ChatGPT developer OpenAI. Analysts believe Broadcom will grow earnings by an average of 18% per year over the long term. Recent volatility has plunged the stock from a forward price-to-earnings ratio of 38 to 30, making Broadcom an increasingly compelling stock idea given its growth prospects.
2.Microsoft-
Technology giant Microsoft (NASDAQ: MSFT) could be a case of the rich getting richer. Microsoft is weaving AI into its tech empire, adding AI capabilities to its consumer and enterprise software products and making Azure a leading platform for powering AI applications. Remarkably, a company with nearly a quarter-trillion dollars in annual revenue is still growing at double-digit rates, and analysts expect long-term annual earnings growth of more than 13%. Decades of growth have made Microsoft one of the best stocks ever; shares have returned nearly 680,000% since its initial public offering (IPO).
Microsoft has generated $74 billion in cash flow over the past four quarters, more than most publicly traded companies are worth. It’s enough to invest in growth, buy back shares to fuel earnings growth, and pay a dividend that’s grown for 22 years in a row. Microsoft is one of only two publicly traded companies with a perfect AAA credit rating, higher than the U.S. government. An unmatched combination of safety and upside makes the stock a no-brainer for any investor.
The stock is trading at a price-to-earnings ratio of 34 today, compared with a five-year average of 32. Keep an eye on Microsoft for a potential buying opportunity. Earnings growth will steadily drive that ratio down in the coming quarters, and market volatility could make the stock an attractive buy sooner than you might think.
3. Palantir Technologies
Data analysis company Palantir Technologies (NYSE: PLTR) is the youngest stock in this group, but it could have the most potential for long-term growth. Palantir builds custom software applications on its own platforms, Gotham, Foundry, and Artificial Intelligence Platform (AIP). The U.S. government has used Palantir’s technology for more than a decade in the military and other branches. Now Palantir is pushing into the private sector, where its AIP platform is seeing strong demand from companies trying to develop and launch AI applications.
Palantir has consistently turned a profit under generally accepted accounting principles (GAAP), likely confirming its long-term staying power. Its fortress-like balance sheet supports that; Palantir has zero debt on its books and $3.8 billion in cash. The company still has fewer than 300 U.S. commercial customers, though that number grew 69% year over year in Q1, underscoring its strong momentum.
Analysts believe Palantir will grow earnings by an average of 22% per year over the next three to five years, and broad demand for AI and data analytics could fuel growth much further. The stock already reflects plenty of short-term growth; shares trade at a hefty price-to-earnings ratio of 75, which is steep even for a company growing this fast. That makes Palantir a perfect candidate to buy if a market downturn drives the price lower.
Should You Invest $1,000 in Broadcom Now?
Before buying Broadcom stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now…and Broadcom wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $638,800!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 6, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Investing During a Recession: 3 Tech Stocks to Target was originally published by The Motley Fool
