5 stocks that Fools believe will lead the AI revolution

There’s little doubt that this is the hot topic within investing right now. There are many AI-related stocks on the market — but which are worthy of more research, with a view to investment?

Apple

What it does: Apple designs, develops and sells consumer electronics and online services.

By Paul Summers: I can’t help but agree with star UK fund manager Terry Smith that it’s tricky to know which stocks will emerge as winners from the AI revolution. The speed at which progress is being made is truly mind-boggling.

Even so, I would be amazed if Apple (NASDAQ: AAPL) fell asleep at the wheel. While we don’t know exactly what it’s working on in this space, it’s got a mountain of cash and bucketloads of expertise to do it.

Too big to fail? Not necessarily. Look at what eventually happened to firms like Nokia (mobile phones) and Yahoo (search engines). Even if this doesn’t happen, some volatility in the share price is inevitable. 

Still, I suspect it’s riskier to be ‘out’ than ‘in’, especially when the next update from CEO Tim Cook lands. If I didn’t already hold the stock indirectly via several funds, I’d be looking to get some exposure.

Paul Summers does not own shares in any of the shares mentioned above.

Kainos Group

What it does: Kainos Group is a Belfast-based digital transformation specialist that’s listed on the FTSE 250 index.

By Royston Wild. The US tech giants like Nvidia, Microsoft and Meta might be grabbing all the attention right now. But UK share investors can look closer to home to get decent exposure to the artificial intelligence (AI) boom.

Kainos Group (LSE:KNOS) is one top British stock on my radar today. Its share price has sunk in recent months on news of falling bookings (down 9% between April and September). I think this represents an attractive dip-buying opportunity for long-term investors.

City brokers certainly expect the FTSE 250 firm’s share price to rebound strongly, and soon. The company has an average 12-month price target of £14.12 per share, based on estimates from nine analysts. That’s a 33% premium from current levels.

Kainos helps private and public organisations to adapt their operations for the digital age. AI is one area in which it has built significant expertise during the past decade. And it is stepping up investment in the field of generative AI to maintain its edge: last summer it announced a £10m strategy that would include training 1,000 of its staff in AI tools and Copilots.

It be a small fish compared to those AI giants on the other side of the Pond. But Kainos is still packed with excellent growth potential.

Royston Wild does not own shares in any of the shares mentioned above.

Polar Capital Technology Trust

What it does: a UK-based investment trust designed to provide exposure to major tech stocks that drive AI.

By Mark David Hartley The majority of stocks leading the AI revolution are based in the US, but you can gain exposure to them via this British investment trust.

The Polar Capital Technology Trust (LSE:PCT) is a British investment trust designed to take advantage of the surging demand of companies driving the AI revolution. Earnings and revenue slumped in 2023 but are beginning to recover.

The trust includes top names in the AI boom, including Microsoft, Nvidia, Meta, Apple, Alphabet, Amazon and AMD. These companies are all heavily invested in advancing AI technology via innovative software development, user-interface design, and computer chip manufacturing.

The trust has a good price-to-earnings (P/E) ratio of 6.9, considerably less than the industry average of 13.8. The balanced nature of an index means returns may be less than those achieved by investing in individual stock options. But usually this means volatility is also reduced and returns are more reliable. 

Mark David Hartley does not own shares in Polar Capital Technology Trust.

Relx

What it does: Relx is a global provider of information-based analytics and decision tools for professional and business customers.

By Andrew Mackie: Mega-cap tech stocks in the Nasdaq might be grabbing all the headlines when it comes to the AI revolution, but I am looking beyond the mainstream for investing opportunities.

Relx (LSE: REL) is a little-known FTSE 100 company that I’m looking to invest in. The business creates actionable insights from data. This is its competitive advantage.

One area where I expect to see huge growth in the coming years is in the legal profession. Law as a body of knowledge is more prone to so-called AI hallucinations. This is where machine-learning algorithms invent content.

To tackle this problem, it has created a proprietary generative AI model as part of its Lexis legal offering. All case law citations are first checked against Shephard’s citation index, effectively the bible for the profession.

The opportunities for AI in the legal profession are potentially limitless. Legal drafting, and insightful summarisation of new and existing case law will transform the day-to-day work of both solicitors and barristers.

The stock has risen 35% in the past year and now trades at a price-to-earnings multiple of 36. This isn’t a sky-high valuation given future growth opportunities, but if sentiment toward the AI sector as a whole begins to wane, then the risk of a major correction in its share price cannot be ruled out.

Andrew Mackie does not own shares in Relx.

TSMC

What it does: Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer.

By Ben McPoland. Nvidia has been the golden child of the AI revolution so far. But will it still be in 10 years? We don’t know. But I’m pretty confident that TSMC (NYSE: TSM) will still be making AI chips in 2034. Whether that’s for Nvidia or whoever.

Today, the company has over a 50% market share in semiconductor manufacturing, including around 90% for advanced AI chips. And it is seeing incredible demand due to this game-changing technology right now.

Founder Morris Chang recently said that customers aren’t “talking about tens of thousands of wafers. They are talking about fabs…’We need so many fabs. We need three fabs, five fabs, 10 fabs.’”

A fab is a large fabrication facility, and a state-of the-art one costs $15bn-$20bn to build. So the barriers to entry in this industry are insanely high.

The main risk with the stock is China-Taiwan tensions. Meta recently switched to rival Samsung Foundry over geopolitical risk and the threat of supply chain disruption. Other firms could follow.

Nevertheless, TSMC should continue playing a leading role in the AI revolution. It makes Nvidia’s AI chips, so there wouldn’t be one without it.

Ben McPoland owns shares in TSMC.

The post 5 stocks that Fools believe will lead the AI revolution appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet, Apple, Kainos Group Plc, Meta Platforms, Microsoft, Nvidia, RELX, and Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.