AI Stock Sell-Off: Here's How to Find the Long-Term Winners

AI Stock Sell-Off: Here's How to Find the Long-Term Winners

Adria Cimino, The Motley Fool

5 min read

Artificial intelligence (AI) stocks represented a gold mine for investors over the past three years. Companies developing or selling AI products and services saw their share prices take off as investors aimed to get in early on this game-changing technology. In the initial stages of the AI boom, these players were the first to monetize their investments. For example, chip designers' revenue soared as customers rushed to buy chips to power the training of large language models -- these are the workhorses of AI.

But, over the past few months, the path hasn't been so smooth for AI stocks or their shareholders. In fact, an AI stock sell-off unfolded, with investors rotating out of many AI giants in favor of stocks in other industries. This happened amid various uncertainties -- from concerns about the economy to worries about the war in Iran -- that damaged investor appetite for growth assets.

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This doesn't mean the AI story is over, though. Buying opportunities remain, so after the recent AI stock sell-off, here's how to find the long-term winners.

Today's AI environment

First, it's important to talk about the AI environment today and what's likely to unfold in the coming years. Over the past several quarters, cloud companies have invested billions of dollars to build out infrastructure -- this is to serve demand as it's exploded higher. And the work is far from over. In fact, major cloud players aim to spend nearly $700 billion this year alone to support this build-out.

Though some investors have worried about the pace of spending, demand for this infrastructure hasn't relented -- and at the same time, the actual use of AI, which will drive the AI market of tomorrow, requires compute. This means capacity is needed today, and it likely will be necessary well into the future, too.

To find AI stocks that will benefit from the AI boom over the long term, it's important to look for the following four elements -- and ideally, each AI stock you buy will have all of these.

1. An AI growth track record

The company has demonstrated its AI strengths and generated revenue growth during the early stages of the AI boom. It's developed a spot in this exciting market and has shown that its products or services can generate significant revenue.

A great example of this is Palantir Technologies(NASDAQ: PLTR), which has clearly won over government and commercial customers with its AI-driven software, a platform that helps them make better use of their data. Palantir has been around for more than 20 years, progressively building out its technology, and all of that effort is now generating great returns.

2. Clear long-term prospects

The AI company has set out logical goals and offers goods or services that should result in growth well into the future. For this, look no further than Nvidia (NASDAQ: NVDA). The AI chip giant aims to update its chips on an annual basis, which should keep its technology ahead of that of rivals.'

And chips are needed to power the actual use of AI in the real world, meaning it's very likely that, as long as AI is in use, Nvidia will be at the heart of the story.

3. The company isn't a one-trick pony

A company highly specialized in one area may win in AI -- but it comes with more risk than a player that's diversified across AI or even into other businesses. Amazon(NASDAQ: AMZN) is a fantastic choice here as it's a leader in e-commerce and cloud computing -- and through the cloud business, it's also become an AI powerhouse. Amazon Web Services is the biggest cloud provider globally, and Amazon is seeing high demand from AI and non-AI customers. All of this makes it very likely that Amazon will continue delivering significant growth over time.

4. A solid moat

A strong competitive advantage ensures that today's leader won't be unseated further down the road. Taiwan Semiconductor Manufacturing(NYSE: TSM), as the world's biggest chipmaker, has the infrastructure and expertise that should keep it in this position. It would be very difficult for a rival to build out a similar presence and lure big tech customers away from TSMC. The bottom line: A moat may separate the AI winners from the AI losers as the AI story unfolds.

A final thought

Above, I mentioned one company as an example of each strength -- but these players actually each have all four strengths that should lead to AI success. And there are many others out there that also check off all of those boxes. It's also key to consider valuation and select stocks that may be trading in bargain territory right now. By doing all of the above, you could take advantage of the recent sell-off and find the AI stocks that are most likely to emerge as winners over the long haul.

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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.