Artificial intelligence stocks have been the biggest driver of the bull market since the end of 2022. Unfortunately, during the recent market sell-off, they have also been some of the biggest losers.
Not all AI-enabled companies will create lasting wealth for investors, and their stock prices may continue to decline over the long term. But buying the best companies with enduring competitive advantages across multiple sectors should generate strong returns for shareholders. And if you can buy when stock prices are falling, as we've seen recently, you'll do even better.
Here are three artificial intelligence stocks you should buy without hesitation amid the current market sell-off.
Image source: Getty Images.
1. Amazon
Amazon (NASDAQ: AMZN) is a leading public cloud provider that is an essential resource for AI training and development. While the growth of AI has paved the way for competing hyperscale cloud providers such as Microsoft (NASDAQ: MSFT) to gain new customers, Amazon has held its own. The company's cloud platform, Amazon Web Services, maintained its leadership position with revenue growing 19% in the most recent quarter.
But Amazon is more than just a cloud computing company. It's a dominant force in e-commerce. Amazon's Prime membership creates a virtuous cycle for online sales: As more customers sign up, more merchants in the market use Amazon's fulfillment network to take advantage of Prime shipping. This gives Amazon more money to invest in logistics, speeding up deliveries and making Prime more attractive. Amazon delivered more than 5 billion items to customers' doorsteps the same day or the next day in the first six months of the year.
Amazon is also the world's third-largest digital advertising company, with second-quarter sales exceeding $50 billion, up 20% from a year ago. This high-margin revenue is a big source of profit for the company, as its retail business has very thin margins.
Amazon goes through cycles of investment and scale, and the company benefits from its investments. Each cycle brings more and more free cash flow. Recent initiatives have paid off, generating $53 billion in free cash flow over the past 12 months. Despite its investments in AI, Amazon has been reducing spending in its fulfillment centers, so cash flow growth is likely to continue for some time. The stock is currently trading at a 10-year high free cash flow yield, which is attractive at this price.
2. Microsoft
Microsoft is the fastest-growing hyperscale cloud provider, but its cloud platform, Azure, grew 29% last quarter, still missing Wall Street's lofty expectations. This selloff could be a golden opportunity for long-term investors, as management expects Azure revenue to accelerate in the second half of the year, despite strong growth over the past few years.
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Microsoft is investing heavily in AI. Since adding $10 billion to its investment in OpenAI in early 2023, the company has spent billions building out data centers and buying the chips needed for its servers. But while these capital expenditures are upfront, it will take time for Microsoft to deploy all of the chips and get its servers up and running to serve Azure customers. Microsoft doesn't expect it will have any trouble meeting demand once the extra capacity is online.
Microsoft has become the number one source for AI-focused developers, and its consumer and enterprise AI service, called Copilot, is also seeing strong growth: Executives said the company's Copilot customer base grew 60% quarter-over-quarter, and with more than 400 million Office 365 customers, there's plenty of room to grow.
Microsoft stock isn't cheap by valuation standards. The company is valued at more than 10 times analysts' revenue estimates for next year. The company trades at nearly 31 times forward earnings, well above the S&P 500 average, not to mention the company's historical valuation over the past 15 years. But Microsoft is growing faster than it has in a long time and has a long growth trajectory ahead, justifying a premium valuation.
3. Adobe
Adobe (NASDAQ: ADBE) is best known for its designer-essential creative software suite, including Photoshop, Illustrator, and Lightroom. Last year, the company announced new generative AI features powered by the Firefly model. Firefly was trained on Adobe's own data, including its stock image library. Firefly's features include generative fill and generative expand in Photoshop, text-to-vector conversion in Illustrator, and object removal in Lightroom.
These new features have helped Adobe attract and retain users over the past year, encouraging free Adobe Express users to sign up for paid subscriptions and encouraging paid subscribers to pay more for broader access to AI capabilities. As a result, the company's key metric, annual recurring revenue, has returned to growth. Last quarter, ARR came in at $487 million, beating analysts' expectations, and management provided strong guidance for the current quarter.
Adobe is looking to replicate the performance in its creative suite with Document Cloud (Acrobat) and marketing platform. New AI tools will help automate and generate output for users, potentially leading to increased subscriptions and higher subscription revenue per user in the future.
While generative AI has brought several new creative design tools to market, Adobe benefits from a powerful network effect as the industry standard: designers looking for work need to be familiar with Adobe's software, and companies looking for design jobs need access to Adobe's tools. This creates a virtuous cycle that makes Adobe's position difficult to displace.
Adobe's stock is currently trading at an enterprise value to sales ratio of about 11, below its average over the past decade. Similarly, the company's forward PE is about 27, below its historical average but very attractive given its growth prospects. This makes the stock a great buy amidst growing selling pressure.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Adobe, Amazon, and Microsoft. The Motley Fool owns shares of and recommends Adobe, Amazon, and Microsoft. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) Stocks to Buy During the Stock Market Sale was originally published by The Motley Fool.
