Some have called AI a “revolution” similar to the rise of the Internet, or a modern-day “gold rush” with the potential to boost productivity and corporate profits. But others have called the technology little more than a “narrative” for investors to cling to while stocks rise and an excuse for unjustified price hikes. Fortune 500 companies have spent billions on AI, but until now there has been little economic data to support any productivity gains.
However, most experts agree that it is only a matter of time before these benefits appear. Some companies are already cashing in on the artificial intelligence boom, according to Erica Klauer, a technology portfolio manager at Jennison Associates, an investment management firm with $194 billion in assets under management. “AI is worth the investment in many industries,” she said. Luck. “This is an exceptional opportunity.”
Klauer and Jennison, who make long-term bets on companies with strong growth potential, were betting on the artificial intelligence boom by snapping up shares of semiconductor giant Nvidia. As told by Marc Baribeau, head of the company’s global capital department Luck late last year: “With generative artificial intelligence, we are entering the fourth era of computing. And the most important company in the fourth era of computing will be Nvidia.”
At the time, Baribeau named Nvidia his top pick for 2024, and the stock has since risen more than 80%. Even after the AI boom of the last few years, there are several key sectors that will continue to drive growth in AI stocks like Nvidia, Klauer said. “Probably the two most important new markets that have the potential to monetize the investments needed for AI are healthcare and the public sector,” she said.
Klauer highlighted medical imaging, genomics and drug development as three areas in the healthcare sector that are already creating “much higher demand for artificial intelligence services than previously expected.” But it is the desire of nation states to develop their own artificial intelligence systems that Klauer believes will truly drive the growth of several key artificial intelligence companies.
“As far as sovereignty is concerned, there are countries that do not want their models to be trained on US norms and customs. They would like to have their own version of ChatGPT, taught in their own languages… with their own archives, with their own cultural nuances,” she said. “And so these governments are going to find their own AI initiatives—and this is an extraordinary opportunity.”
Klauer explained that she is so optimistic about the desire of nation states to get into the AI game because it is not something that is driven or dependent on the state of the economy. That AI spending will be “more aligned with a social and national security perspective,” she said, meaning stable, long-term growth.
All of the companies that Klauer believes will thrive over the next decade are firms that can take advantage of key areas of healthcare and national growth by providing chips, chip-making equipment and data centers where AI runs. They may not be cheap, but good things are rare.
So, for investors with a long-term view, these are the three best AI stocks for the next decade, according to Klauer:
AFM Lithography
The first company Klauer singled out was semiconductor equipment giant ASM Lithography. You’ve probably never heard of the $402 billion market cap company, but you’re likely unknowingly using their technology right now. ASM Lithography makes equipment, including lithography machines, integrated circuits and more, that allows other companies to create semiconductors.
All of the world’s most advanced semiconductor foundries are now using ASM Lithography technology, including Taiwan Semiconductor (TSMC), Samsung and Intel. And as companies release new AI chips every year to power new generative AI systems, Klauer says, semiconductor equipment will become increasingly complex, which should benefit traditional companies like ASM Lithography.
The company has a Warren Buffett-style moat, she said. Berkshire Hathaway’s Buffett famously argued that good business models often have significant barriers to entry, or moats, that prevent competition from coming in and destroying the company. Klauer said ASM Lithography’s main advantage is the technology that allows it to place the layers of transistors needed for semiconductors to function.
“ASM lithography allows you to image or place transistors 1/100th, 1/1000th or 1/5000th the width of a human hair,” she explained. “This is an extremely complex core competency in optics, in fact it is a market that ASM Lithography has dominated for many years. And as chips become more complex, this strengthens their strength as a technology leader and also translates into higher prices.”
Nvidia
Semiconductor giant Nvidia will become Klauer’s second-largest AI company in the next decade. After rising 1,743% over the past five years, some investors are beginning to doubt whether semiconductor giant Nvidia can continue to exist, but Klauer and Jennison Associates remain believers.
“At Jennison, we always look at the long term. And we tend to stick with companies that we think can sell, get, share, hold or increase their prices and innovate to incrementally expand the market. And there are a lot of companies that fit that bill, but Nvidia is literally at the top of that list,” she said.
Klauer highlighted growth opportunities in software, autonomous vehicles, robotics, augmented reality and gaming over the next decade. She also noted that Nvidia has already been able to take advantage of the introduction of artificial intelligence in the healthcare industry. The company generated more than $1 billion in healthcare revenue in fiscal 2024, three years ahead of its previous target.
“So I think Nvidia is really well positioned in terms of revenue growth, profitability, management team depth is excellent, bench depth is excellent,” Klauer added. “And the company is managed properly from a balance sheet and operational control standpoint, so Nvidia is certainly at the top of that list.”
Microsoft
Microsoft is Klauer’s latest top AI stock for the next decade, but it’s not the company’s investment in now-famous AI startup OpenAI that has her bullish. The Microsoft Azure cloud computing platform is a real gem.
Azure has been stealing market share from rival Amazon Web Services for years. And in the final quarter of last year, Azure’s revenue grew 30% year-over-year, while AWS saw only 13% year-over-year growth. Klauer expects this rapid growth to continue amid the artificial intelligence boom. Over the next decade, Microsoft aims to provide the “core foundation” for what Klauer calls “AI factories.”
“Right now we still have about 20% of all workloads accelerated inside the data center. And not only will we probably get to 100%, but the net number of workloads will change in a positive way, because there are so many different reasons why you want to create new workloads that need to be accelerated, because of their usefulness in many different industries. ” She said.
Honorable Mention: Broadcom.
A quick honorable mention here to Broadcom, as Klauer said that picking her top three AI stocks was “almost like asking me to pick my favorite child.” The $625 billion tech giant is known for making a range of semiconductor and infrastructure software products, but it’s networking chips that make Broadcom a good long-term bet, according to Klauer. For artificial intelligence systems to get enough computing power to operate, they need huge data centers filled with thousands of computers, and networking chips are critical to these data centers.
“Network chips are like traffic cops directing signals around the data center,” Klauer explained. “That’s why they are very important. And they are getting faster and faster and faster in their ability to route that traffic.”
Klauer states that “there really is one company that dominates our review in the most important way, and that’s Broadcom, which is why it’s also one of our favorite long-term picks.”