3 AI Stocks to Buy Before the Next Leg Up

While the market is laser-focused on what is going on in Iran, I think the next leg up in the market could occur when that conflict is wrapped up. While nobody knows for sure when this will happen, investors need to position themselves now, as the rebound could be quick.

I believe investors who have moved their assets to more conservative positions during the conflict will be inclined to invest those funds into more aggressive sectors, such as artificial intelligence (AI) investing. There are several compelling stocks to buy in this sector, but these three intrigue me the most.

Image source: Getty Images.

Microsoft

Microsoft (NASDAQ: MSFT) is an AI hyperscaler, and it's spending a ton on capital expenditures to build out its AI computing footprint. However, it is already seeing a huge return on investment for its spending. Microsoft's cloud computing division, Azure, saw its revenue rise 39% year over year during its last quarter. That showcases that Microsoft's AI spending is justified, because there is plenty of demand that has yet to be fulfilled.

Despite this success, Microsoft's stock is valued near a decade low. I prefer to use the operating price-to-earnings ratio with Microsoft's stock, as it ignores one-time accounting effects and also investment gains, such as those from its OpenAI investment. From this standpoint, Microsoft's stock has seldom been this cheap over the past decade.

MSFT Operating PE Ratio data by YCharts.

Anytime you can scoop up shares of a stalwart like Microsoft at a huge discount to where it was trading, I think it's a smart idea. Right now is a great time to invest in Microsoft, and when the market's next leg up starts, I expect Microsoft to be an outsized winner.

Alphabet

Last year, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) was the cheap stock that everyone was concerned about. However, through a combination of external conflicts being wrapped up and internal successes in developing its generative AI tools, Alphabet emerged as a leader in the AI space. It has maintained this status over the past few months, but its stock has fallen a bit and is now down nearly 15% from its all-time highs established earlier this year.

Like Microsoft, I think this is a gift for investors, because Alphabet's AI strategy of offering cloud computing services is panning out. Unlike Microsoft, Alphabet also has its own generative AI tools. This can be a huge boost for marketing its cloud computing tools, as Alphabet can specifically tailor its tools to match its model.

Alphabet has already done this with its custom AI chip, known as the Tensor Processing Unit (TPU). TPUs offer lower-cost inference and training than traditional graphics processing units (GPUs), making Alphabet a top option for developers to create AI models. I believe this will make Alphabet a huge winner in the AI race.

Broadcom

Broadcom (NASDAQ: AVGO) and Alphabet partnered to make the TPU. Alphabet brought its computing needs and workload specifications, while Broadcom did a lot of the design work. This created a product that offers superior capabilities at a lower price point, but at the cost of flexibility. Only one type of workload can be run through these AI chips, but if the workload is commonized, this doesn't matter.

Broadcom expects monster growth from its custom AI chips over the next few years. By 2027, it believes this division will produce over $100 billion in sales. For reference, the division that these custom AI chips are currently accounted in generated $8.4 billion in sales during its past quarter. That is an immense upside for Broadcom, and with Wall Street analysts projecting 64% revenue growth this year and 49% growth next year, it's a top AI stock to buy now.

Keithen Drury has positions in Alphabet, Broadcom, and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.