Should You Really Buy Artificial Intelligence Stocks Right Now? Evidence is Piling Up and Here's What it Says.
Key Points
AI stocks soared over the past three years as investors bet on the promising technology.
But in recent times, various headwinds have halted the momentum.
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Artificial intelligence (AI) stocks powered the overall market higher in recent years -- investors were eager to get in on these exciting companies working on a potentially game-changing technology. And many of these players quickly delivered growth as customers rushed to buy their AI products and services. For example, companies like Nvidia, Broadcom, and Alphabet have seen their revenue and stock prices climb. All of this helped the S&P 500 advance 78% over the past three calendar years.
But, in recent times, the picture hasn't been as bright for AI stocks. They've lost momentum for a variety of reasons. Investors have worried about the rapid pace of AI spending and whether it will result in significant revenue growth. On top of this, geopolitical concerns, as the war in Iran continues, have represented another headwind. Uncertain times always weigh more heavily on growth stocks as these companies rely on spending and strong economies to expand.
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Meanwhile, this drop in AI stocks has left many trading at attractive valuations.
Considering all of this, should you really buy AI stocks right now? Evidence is piling up, and here's what it says.
Image source: Getty Images.
Excitement about AI
So, first, a quick summary of the AI story so far. As mentioned, AI stocks roared higher over the past few years as investors got excited about this technology's potential. AI may help companies streamline operations, saving time and money, and the technology may also facilitate innovation. All of this could result in an earnings win -- and therefore, boost stock performance.
Demand is high for AI chips and systems that power crucial AI tasks, and this has boosted the revenue of many companies -- from chip designers to cloud service providers. And we're starting to see the use of AI in the real world as AI helps customers shop on an e-commerce site or takes their order at a restaurant.
This real-world use of AI, involving inference to power the "thinking process" of AI models and the launch of AI agents into the world to get the job done, should continue to drive the next stages of growth.
Still, investors have worried about big tech's massive investment in AI in recent times, and this has contributed to the pullback in AI stocks. And turbulent geopolitical times haven't helped matters.
Stock performance following the tariff announcement
Now, let's return to our question: Should you really buy AI stocks now? It's impossible to predict when the geopolitical tensions might ease, but history shows us that times of uncertainty don't weigh on stocks indefinitely. Last year, growth stocks sank after President Donald Trump's initial tariff announcement, then later went on to rebound and advance.
^IXIC data by YCharts
As for worries about the future AI revenue opportunity, signs support the case for growth. A broad range of AI players, from chip designer Nvidia to cloud services provider Amazon and AI software company Palantir Technologies, have all spoken of ongoing high demand for their products and services. Nvidia chief Jensen Huang, at the GTC conference this week, said current orders and those through 2027 are putting the company on track for revenue of $1 trillion or more. AI neocloud provider Nebius Group even said recently that demand for capacity continues to surpass supply. This context of soaring demand doesn't signal a diminishing revenue opportunity.
All of this suggests that it's logical for tech giants to invest to support this demand.
Meanwhile, the valuations of AI stocks, in many cases, have reached reasonable, and even cheap, levels, as shown in the chart below.
NVDA PE Ratio (Forward) data by YCharts
We can't predict with 100% certainty when AI stocks will gather momentum and soar, but evidence has been piling up, and it shows us that the AI story remains promising. All of that means it's a great idea to buy quality AI stocks now when they're trading at reasonable prices. Even if the turbulence persists, that's OK. Clues we've seen today support the long-term AI story, so these stocks may be down today -- but they're well-positioned to deliver investors a win over time.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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