The incredible potential of artificial intelligence (AI) has helped drive strong gains for tech stocks this year. On the other hand, valuations for many AI stocks have recently pulled back, and some of the top players in the space are trading at significant discounts to previous highs.
With the artificial intelligence revolution just beginning to unfold, now may be a great time to build long-term positions in companies that stand to gain big from one of the most transformative technology trends of this century. If you’re aiming to capitalize on the rise of AI, read on to see why two Motley Fool contributors identified these top companies as top buy-and-hold plays right now.
AI will power new growth phases for Amazon
Keith Noonan: Thanks to its incredible technology and resource advantages, I think so Amazon (AMZN -2.99%) It has a very good chance of being one of the biggest winners of artificial intelligence. With the stock still down 24% from higher and multiple AI tailwinds on the horizon, now seems like a smart time to load up on the tech giant.
The rise of artificial intelligence looks set to help the company’s profit-boosting Amazon Web Services (AWS) segment enter a new growth phase. As the largest player in the cloud infrastructure space, Amazon has more customers than any of its competitors. It also has access to more data. Data is the fuel that helps power and improve artificial intelligence models, giving Amazon a key advantage in the AI race. But Amazon is hardly resting on its laurels when it comes to AWS.
For years, the company has been designing custom chips to power customers’ artificial intelligence software through its cloud data centers. It is also bringing software tools to make AWS the go-to destination for building and deploying AI software. Through Amazon Bedrock, customers are able to leverage existing large language models that can be customized to their needs and used to build, run and scale artificial intelligence applications.
Even better, I believe AI has the potential to improve profitability for a company’s online retail operations. Last year, the company’s e-commerce-focused North America and international business segments accounted for $433.9 billion of the company’s $514 billion in sales. At the same time, these segments posted a combined operating margin of -2.4% and an operating loss of $10.6 billion.
As AI opens the door to improved warehouse automation and autonomous delivery services, Amazon should be able to lower operating costs as a percentage of revenue for its e-commerce business. With a large sales base for its online-retail business, even relatively modest improvements in operating margins in e-commerce make the overall business more profitable. Artificial intelligence could be the key to massive profits for Amazon’s online retail empire.
Netflix is using AI to help you find content to binge-watch
Parkev Tetevosian: Artificial intelligence can be implemented in many forms, including large language models, driverless technology, and recommendation systems. A growth stock that benefits from the increasing effectiveness of artificial intelligence Netflix (NFLX -0.89%). A good recommendation system keeps users engaged for longer, making them more likely to keep their Netflix subscription. Fortunately for investors, the stock is not prohibitively expensive.
With abundant content, Netflix aims to highlight the most relevant content for each subscriber. If they are successful in this task, people will get more value from their subscriptions and subscribe. Plus, those people will be willing to pay the inevitable price hikes Netflix will try to implement in the coming years. Netflix increased revenue from $8.8 billion to $31.6 billion from 2016 to 2022. Helping customers get more value can further increase a company’s sales.
I am generally not impressed with revenue growth unless it results in improved profitability. Netflix isn’t one of those businesses that isn’t experiencing profitable growth. Indeed, in the same years mentioned earlier, Netflix’s operating income went from $380 million to $5.6 billion. Given the top-line profitability, it would be reasonable to expect Netflix to grow further from these levels. AI can help Netflix allocate content budgets more effectively by highlighting movies and series that are likely to succeed.
In my opinion, Netflix stock is priced moderately at a forward price to earnings of 28. Consumers prefer to watch their content over streaming connections, adding millions of new subscribers every year. If you buy Netflix stock now and hold it for a long time (a decade or more) there is a good chance that your wealth will grow.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of Amazon subsidiary, The Motley Fool. Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian, CFA does not have a position in any of the stocks mentioned. The Motley Fool has positions and recommendations on Amazon.com and Netflix. Motley Fool has a disclosure policy.