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Riding the AI Wave: The Must-Have Stocks for Future-Focused Investors

Money growing in soil , Business success concept.
Image source: Getty Images

Written by Brian Paradza, CFA at The Motley Fool Canada

Artificial intelligence (AI) is the most recent civilization wave taking the world by storm. Tech firms have been releasing amazingly capable generative AI models for the past 12 months. Investors are pumping billions of speculative dollars into AI projects, including in high-risk AI startups with unproven business models. Serious money has been made Fortunately, Canadian individual investors can still ride the AI wave today without assuming excessive capital risk.

The future is packed with workflow-changing AI platforms. Stack Overflow, a question-and-answer platform for software developers, recently laid off 28% of employees as traffic dropped as coders turned to AI for help. Global business consultancy firm PwC teamed up with OpenAI (the ChatGPT creator) to deploy new generative AI models for tax, legal, and human resources. AI adds a potential source of competitive advantage and margin expansions for the innovative business.

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Future-focused investors should take strategic positions in the AI value chain as the AI wave unravels.

Which stocks are gaining the most on the AI wave? And why?

Although it was a privately held startup OpenAI that kicked off the ongoing generative AI frenzy (with Microsoft’s multi-billion support), big tech stocks have generated immense wealth for investors so far in 2023 – even before they could convincingly prove their prowess in monetizing AI projects.

Early gainers include Nvidia (NASDAQ:NVDA) stock, which has surged 193% year to date. Meta Platforms stock is up 160%, Apple stock has firmed 33% , Alphabet stock has soared 57% so far this year while Amazon.com stock surged 50% year to date. Amazon plans to invest up to US$4 billion (C$5.5 billion) in OpenAI’s rival Anthropic.

Nvidia stock is one exception on the “show me the money” front. Its quarterly data centre revenue surged 141% sequentially by August, powered by ballooning AI-chip and software sales as customers line up for its awesomely capable, efficient, and yet very expensive AI offerings.

So why have big tech stocks gained on the AI wave? Market sentiment is that large technology companies have deep pockets to fund expensive AI developments. They have massive treasure troves of “free data” for AI model training and a wide global reach. In sum, big tech has all it reasonably takes to profitably bring affordable AI to the mass market. They remain a must-have group of stocks to hold and play the AI wave.

How can Canadian investors profitably ride the AI wave?

Most of the hottest AI stocks are domiciled in the United States, with a few listed on Canadian stock exchanges. Canadian investors have room to participate in U.S. AI stock rallies through direct investments (in USD) through their favourite online brokerage accounts. Alternatively, they can buy foreign-currency-hedged Canadian Depository Receipts (CDRs) on the desired stocks on CBOE Canada (formerly NEO Exchange).

Most big tech U.S. AI stocks have CDRs trading on the CBOE Canada exchange.

The AI value chain retains the significant potential to deliver wealth gains to Canadians. Investors could cast nets wider to include suppliers to AI chip manufacturers, memory chip manufacturers who support the data manipulation process for AI-ready inputs, and business consultancy stocks like CGI, which are making wide corporate adoption of generative AI possible globally.

OpenText: The must-have Canadian AI stock for future-focused investors

OpenText (TSX:OTEX) is a $12.3 billion blue-chip Canadian tech stock that’s rejuvenating its mature information management business by embracing new AI growth opportunities. The company’s $6 billion acquisition of Micro Focus this year added significant AI capabilities within OpenText. The company launched a futuristic opentext.ai platform in August that management is aggressively promoting to empower customers with data-manipulative AI capabilities.

The company is working on releasing a new AI product every 90 days. Its well-established business generates recurring positive cash flows and management forecasts a free-cash flow bump from nearly $0.9 billion in the fiscal year 2024 to $1.5 billion annually by 2025 as AI investments take effect. Free cash flow significantly empowers OpenText to make accretive acquisitions and amplify its annual total revenue growth rates into the low double-digit ranges.

Most noteworthy, an investment in OpenText stock pays a quarterly dividend that currently yields 3% annually. Investors may earn low-risk dividend yields while waiting for AI’s magic to propel OTEX stock higher as the wave takes permanent form.

OpenText stock has delivered 23.6% in total shareholder returns over the past year.

The post Riding the AI Wave: The Must-Have Stocks for Future-Focused Investors appeared first on The Motley Fool Canada.

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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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon.com, Apple, CGI, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

2023