3 Reasons to Stay Bullish on Artificial Intelligence Stocks
Technology investors enjoyed a period of exceptional gains, fueled by the seemingly unstoppable momentum of the industry. Giants in the sector propelled the Nasdaq to impressive returns, and individual stocks within the Artificial Intelligence (AI) space delivered remarkable returns.
For example, Nvidia (NVDA) saw its stock surge 1,600% over the past five years, and Palantir Technologies advanced over 800% since its 2020 market debut. These are just two examples demonstrating the potential of the sector. Many other companies also generated substantial gains for investors. What drove this outstanding performance?
Optimism about the future of AI fueled investor enthusiasm. AI is a technology with major transformative potential, similar to inventions such as electricity and the internet. AI’s ability to save companies time, energy, and costs, and its potential for innovation and discovery, made it a compelling investment.
However, in recent weeks, several factors have weighed on AI stocks. Investors have expressed concerns about the U.S. implementing export controls on chips to China, recent tariffs imposed on several major trade partners, and overall economic uncertainty. The Nasdaq has declined more than 7% in response to these concerns, with some of its largest members experiencing significant drops. While some might be tempted to exit the tech sector, there are several reasons why AI investors should remain optimistic, and perhaps even consider this a buying opportunity.
1. Manageable and Temporary Headwinds
A significant factor influencing the market is the recent imposition of 25% tariffs on imports from Mexico and Canada and a 20% tariff on imports from China. Tech companies manufacture numerous components and products outside the U.S., potentially leading to higher costs due to these tariffs.
The White House has stated that these tariffs are a response to the flow of dangerous drugs into the U.S., indicating the possibility the tariffs are temporary. While they currently pose a challenge for tech companies, large, profitable entities such as Nvidia and Apple should be capable of managing these challenges and succeeding in the long term.
While export controls on chips to China may not be temporary, they appear manageable. Introduced in 2022, these controls have reduced Nvidia’s sales in China by half compared to pre-control levels. Despite this, Nvidia still achieved a triple-digit revenue increase to $130 billion in the last fiscal year. This demonstrates the company’s ability to overcome that challenge.
When considering investing in chip companies, it’s important to assess the company’s reliance on the Chinese market. However, companies like Nvidia, which are experiencing substantial growth in other parts of the world, remain attractive investment opportunities.
2. AI is Still in its Early Stages
Although the AI boom has already generated billions of dollars in revenue for companies like Amazon, Alphabet, and especially Nvidia, the technology is still in its early stages of development. The AI market, currently valued at $200 billion, is projected to exceed $1 trillion by the end of the decade, offering significant growth potential for AI companies.
Cloud service providers are still increasing their data center infrastructure to meet the growing demand for AI, and customers are launching new AI programs. Simultaneously, we are entering a critical stage focused on applying AI to real-world problems. AI agents, software designed to solve complex issues and implement the solution, are becoming operational in various companies, streamlining operations and boosting revenue.
For example, an AI agent may handle initial inquiries and questions in a call center. Both chip providers and companies using AI agents are well-positioned to benefit as this application phase develops. This indicates that the opportunity in AI is far from over, and many companies should continue to experience substantial revenue growth.
3. Positive Indicators from AI Players
Recent weeks have seen a series of positive indicators, suggesting ongoing investment and growth in the AI sector.
Meta Platforms announced plans to invest up to $65 billion this year to support its AI initiatives, including the construction of a large data center. They plan to end the year with more than 1.3 million GPUs, the chips that power AI functionality. OpenAI announced the Stargate Project, a project aimed at investing $500 billion over the next four years to build out AI infrastructure in the U.S.
Furthermore, Nvidia recently reported “extraordinary” demand for its new Blackwell architecture, which generated $11 billion in revenue during its initial quarter. These examples, along with the multibillion-dollar revenue generated by cloud businesses at Alphabet and Amazon, demonstrate that AI investments are producing favorable results.
These factors suggest that now is not the time to abandon AI investing. Instead, it might represent an opportune time to invest and buy on the dip.
