The first half of the year started off with a bang, with the S&P rising 16% through the end of June. Whether the market rallies through the third quarter, the rest of the year, or into next is anybody’s guess.
That’s the nature of the market.
In the short term, the market will likely take its cues from the Fed, inflation, interest rates and the (declining) possibility of a recession.
But in the longer term, a major trend is taking shape that will impact investing for years to come. That trend is artificial intelligence (AI), and it’s real.
AI is the simulation of human intelligence processes capable of replicating human behavior such as learning and problem solving. It takes technology to another level whereby computers can think for themselves.
AI technology has been known and talked about for a while. But the technology recently got real in terms of company bottom lines a couple of months ago. Semiconductor company Nvidia (NVDA) reported earnings that blew away expectations, citing massive demand for AI technology that was much larger and sooner than the market anticipated.
It took the market rally to another level. But you haven’t missed the boat. The initial surge may be over. But the technology will greatly increase profits for many companies for years to come. It’s a new wave of technology that will have an impact similar to that of internet proliferation or wireless phone mania. It’s a game-changer.
The technology is already all around us. It is part of the GPS system in your car and phone, facial recognition, shopping preferences online, and voice assistance. AI can change our lives in the years ahead. AI is the crucial technology that is bringing about autonomous cars and robot technology and much more.
Whether that captures your imagination or not, there are investment implications with AI that you can’t afford to ignore. According to a recent survey, 67% of U.S. organizations plan to increase their spending on data and AI. A whopping 95% of organizations are increasing their investments as a percentage of revenue. And 97% of executives say AI will be transformative to their company and industry.
The AI market in the U.S. is expected to grow from $86.9 billion in 2022 to $407 billion by 2030. Global estimates for the industry have it around $500 billion in 2022, growing to over $2 trillion by 2030. Estimates vary of course, but I haven’t seen any estimates with less than 20% annual growth until 2030. Research firm Grand View Research estimates the AI market will grow by a staggering 37.3% per year from 2023 to 2030. Another study estimates that the AI industry value will grow by 13 times over the next seven years.
Businesses can’t ignore the tremendous efficiency and cost-saving advantages possible with AI. Technology moves fast, and companies can’t afford to be left behind. It’s now a matter of survival. A mad scramble to adopt AI has commenced, and demand for companies that provide AI products and services is exploding.
Beyond the short-term haze, huge moves will take place in the market. And the phenomenon is just now getting traction. Here are two great dividend stocks to benefit.
2 Income-Generating Artificial Intelligence (AI) Stocks
Few stocks have benefited from the AI craze like AVGO has. The stock is up over 50% YTD, about 100% from the October low. Despite the recent spike, AVGO should still be an excellent long-term investment.
Broadcom is a global infrastructure technology leader and an industry Goliath with $34 billion in annual net revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category-leading products in semiconductors and infrastructure software solutions.
Broadcom provides components that enable networks to operate together and communicate with each other from the service provider all the way to the end user and device. That may sound complicated. But there are two simple reasons to own AVGO. One, it will continue to benefit from businesses moving online and into cloud-based applications. Two, it is getting a huge benefit from the fever to adopt artificial intelligence technology.
The company is an early comer to the technology party that provides crucial infrastructure that enables other technologies that come along the way. The company is so entrenched in the infrastructure of today’s technology that 90% of internet traffic uses Broadcom’s systems.
Broadcom has consistently delivered better-than-expected earnings. It did so again in the most recent quarter and upgraded its earnings guidance for 2023. The company isn’t dependent on product sales but rather the continuing use of technology. It also benefits from AI in a brilliant way.
The company makes generative AI chips. These chips don’t provide AI functions per se but rather the technology that enables AI to connect to all other systems, which it must to be of any use. The sheer volume increases from the new technology as well as soaring demand for the next generations of its chips should enable Broadcom to achieve a much higher level of profit growth for years to come.
Qualcomm Incorporated (QCOM)
Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. Chips account for roughly 75% of revenues while licensing from patents accounted for 25%, although the smaller area is more profitable and better insulated from competition.
Big deal, there are lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of chips that enable 5G technology. Analysts estimate that the 5G chipset market will grow from $2.1 billion in 2020 to over $23 billion by 2026.
Technology stocks also took a hit last year as rising inflation and interest rates increased costs and cut into profit margins. While the tech sector has been strong this year as those things have abated, QCOM has not participated. The stock is only up about 6% YTD as investors worry it will be weighed down by still sluggish phone sales.
Qualcomm describes itself as the “on-device AI leader,” referring to mobile devices. The biggest beneficiaries of the initial AI boost were the companies that benefit from the technology more immediately. But as AI continues to proliferate it will certainly find its way to mobile devices, and Qualcomm will be a primary beneficiary.
QCOM got a 20% bump from AI already. It may be held back by the fate of phone sales in the near term. But this AI wave will eventually reward Qualcomm, and the stock can very quickly make up for lost time when it comes back in vogue.