The best AI stocks to buy now

Artificial intelligence technology, for all the people talking about it, is still in its early stages. While a handful of technology names seem to dominate the space currently, those looking to invest in AI may be wondering which companies are likely to do better as the field evolves. Other investors are clearly eager to jump in despite the uncertainty.

AI stocks took a hit on news about Chinese AI lab DeepSeek in late January and tariffs in April. The Morningstar Global Next Generation Artificial Intelligence Index has returned 26.65% this year to date versus 10.23% for the broad-based Morningstar US Market Index.

Best AI Stocks to Buy Now

To find the best AI stocks, we look to the Morningstar Global Next Generation Artificial Intelligence Index. The AI stocks on this list were among the index’s top constituents, earned Morningstar Ratings of 4- or 5-stars, and were undervalued at the time of writing.

1. Microsoft MSFT
2. Alphabet GOOGL
3. Taiwan Semiconductor Manufacturing TSM
4. Tencent Holdings TCEHY
5. Alibaba BABA
6. Adobe ADBE
7. Cognizant Technology Solutions CTSH
8. Baidu BIDU
9. EPAM Systems EPAM

Here’s a little more about each of the best AI stocks to buy, including commentary from the Morningstar analyst who covers the stock.

Microsoft

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Software—Infrastructure

Our list of the best AI stocks to buy leads off with Microsoft. Known for its Windows operating systems and Office productivity suite, Microsoft develops and licenses consumer and enterprise software. Its stock currently looks 13% undervalued relative to our $600 fair value estimate.

Microsoft is one of three public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Based on its investment in OpenAI, the company has also emerged as a leader in AI. Microsoft has also enjoyed great success in upselling users on higher priced Office 365 versions, notably to include advanced telephony features. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins and deepening ties with customers.

We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $75 billion business, it is still growing at approximately 30% annually. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud creating seamless hybrid cloud environments. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes.

Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power platform, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.

Dan Romanoff, Morningstar senior analyst

Alphabet

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Internet Content and Information

Alphabet is a holding company that wholly owns internet giant Google, and Google services account for nearly 90% of Alphabet’s revenue. We consider Google an AI front-runner, and its investments in AI are a continuation of the effort to safeguard its core product, Google Search. This cheap AI stock trades 14% below our fair value estimate of $237 per share.

We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true technology behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals including search, artificial intelligence, video, and cloud computing.

Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.

We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.

On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.

Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.

Malik Ahmed Khan, Morningstar analyst

Taiwan Semiconductor Manufacturing

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Industry: Semiconductors

Taiwan Semiconductor Manufacturing is the only semiconductor company on our list of the best AI stocks. We believe demand from the US and other Western countries is enough to support TSMC’s AI revenue growth for the next five years. This AI stock appears 22% undervalued relative to our $306 fair value estimate.

Taiwan Semiconductor Manufacturing Co. is the world’s largest dedicated contract chip manufacturer, or foundry, with mid-60s market share in 2024. It makes integrated circuits for customers based on their proprietary IC designs. TSMC has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fabless designers. Like all foundries, it assumes the costs and capital expenditures of running factories amid a highly cyclical market for its customers. Foundries tend to add excessive capacity during times of burgeoning demand, which can result in underutilization during downturns that hampers profitability.

The rise of fabless semiconductor firms has been maintaining the growth of foundries, which has in turn encouraged increased competition. However, most of these newer competitors are confined to low-end manufacturing due to prohibitive costs and engineering know-how associated with leading-edge technology. To prolong the excess returns enabled by leading-edge process technology, or nodes, TSMC initially focuses on logic products, mostly used on central processing units and mobile chips, then focuses on more cost-conscious applications. This strategy has been successful, illustrated by the fact that the firm is one of the two foundries still possessing leading-edge nodes when dozens of peers have lagged.

We note two long-term growth factors for TSMC. First, the consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced nodes. Second, organic growth of artificial intelligence, Internet of Things, and high-performance computing applications may last for decades. AI and HPC play a central role in quickly processing human and machine inputs to solve complex problems like autonomous driving and language processing, which accentuated the need for more energy-efficient chips. Cheaper semiconductors have made integrating sensors, controllers, and motors to improve home, office, and factory efficiency possible.

Phelix Lee, Morningstar analyst

Tencent Holdings

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Internet Content and Information

Among our affordable AI stocks, Tencent looks 26% undervalued compared with our $102 fair value estimate. Tencent holds a prominent position in China’s internet sector, with a diverse portfolio of products and services used daily by a significant portion of the population. The most immediate and measurable impact of Tencent’s AI investments will come from improved advertising technology, which enhances content recommendations and lowers ad creation costs.

Over the past decade, Tencent has capitalized on the mobile gaming boom, owning hugely popular titles such as Honor of Kings and PUBG Mobile. Games remain its primary monetization engine, generating an estimated 60% of operating income. Leveraging unparalleled user data access and substantial financial resources, Tencent is well-positioned to continue developing innovative, high-quality, and enduring franchises.

Beyond gaming, Tencent’s empire encompasses advertising, payments, cloud computing, music streaming, and various other ventures. We see significant untapped value within the WeChat network as monetization increases through advertising.

WeChat’s dominance as China’s largest app makes it a prime marketing channel. Ample advertising revenue opportunities lie ahead, driven by increased user engagement on Tencent platforms, which leads to greater ad inventory, higher ad loads, and improved ad-targeting efficiency.

While games and advertising will remain Tencent’s core revenue drivers, its leading position in financial technology, cloud computing, and enterprise software offers significant long-term value creation potential. Given China’s economic scale and widespread digital adoption, Tencent is poised to benefit from these opportunities by transforming its services into substantial revenue streams.

Tencent’s prowess as an investment powerhouse has fueled its expansion through strategic equity investments. By integrating investees’ services into WeChat and other platforms, Tencent reduces customer acquisition costs and accelerates growth. This strategy has proved highly successful, transforming many small, loss-making companies into profitable listed entities. However, as Tencent matures and the Chinese economy evolves, we anticipate fewer material investment opportunities of this scale in the future.

Ivan Su, Morningstar senior analyst

Alibaba

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Internet Retail

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume. Among its many divisions, the China commerce retail division is its most valuable cash flow-generating business. Shares of Alibaba look 22% undervalued compared with our $156 fair value estimate.

Alibaba is losing market share to PDD and Douyin in the China e-commerce business, and we don’t see a quick fix in the near term. Alibaba’s number of annual active consumers in the China retail marketplace was surpassed by PDD in the fiscal year ended March 2021. Meanwhile, Douyin has gained share from Alibaba, especially in the beauty and apparel categories in recent years, and entered the traditional search-based e-commerce space, competing directly with Alibaba. The number of annual active consumers at Alibaba is close to the ceiling in China. Alibaba’s gross merchandise volume to China’s online retail sales of goods ratio was 62% in the year ended March 2023 at Alibaba, down from 72% in the year-ago period. We believe Alibaba’s marketplace monetization rates will decline in the long run, owing to a mix shift toward Taobao, which has a lower take rate compared with Tmall, and more competition.

In our view, the Taobao/Tmall marketplaces remain as Alibaba’s core cash flow driver and can support the expansion of AliCloud as well as the firm’s globalization strategy, which offers long-term growth potential. While AliCloud will remain in investment mode in the medium term, downsizing low-margin businesses can drive segment margins higher over time. On globalization, the Alibaba international digital commerce group’s year-on-year revenue growth has been strong recently, thanks to AliExpress’ expanding cross-border business.

We expect Alibaba to return more capital to shareholders and increase its return on invested capital after divestments of noncore investments. We are pleased that Alibaba has upsized its share-repurchase program by $25 billion until March-end 2027 to $35.3 billion. Management targets to lift ROIC (based on Alibaba’s calculation) from the single digits in fiscal 2023 to double digits in the next few years. Alibaba had sizable cash and equivalents and investments of CNY 829 billion on its balance sheet as of December 2023.

Chelsey Tam, Morningstar senior analyst

Adobe

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Software—Application

Next on our list of the best AI stocks to buy now, Adobe trades 37% below our fair value estimate of $560 per share. Adobe lays claim to the go-to software products that creative professionals rely on, such as Photoshop, Illustrator, and InDesign, and we think it has carved out a wide economic moat around its business.

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The firm has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower-cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.

CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento, Marketo, and Workfront acquisitions, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company; it is now racing to become a $4 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce, has made a file format that is usable on any screen more relevant than ever.

Adobe believes it is attacking an addressable market well in excess of $200 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher-price-point solutions, and cross-sell digital media offerings.

Dan Romanoff, Morningstar senior analyst

Cognizant Technology Solutions

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
• Industry: Information Technology Services

Cognizant is the first of two information technology services companies on our list of affordable AI stock buys. This global IT services provider offers consulting and outsourcing services to some of the world’s largest enterprises spanning the financial services, media and communications, healthcare, natural resources, and consumer products industries. Shares of Cognizant are 17% undervalued relative to our fair value estimate of $84 per share.

Cognizant is one of the leading IT services providers in the world, with products focusing on software development, including application development and maintenance, systems integration, and process automation. Revenue primarily comes from North America, while the workforce is largely based in India. While Cognizant may not have the same scale in traditional consulting that peers like Accenture possess, the company provides a relatively robust suite of offerings across the IT services value chain. Cognizant was one of the first major IT services players to model its business on outsourcing labor costs to the Indian market, and while that labor arbitrage gap has closed a bit compared with the early days, we still view the business as moaty, benefiting from significant switching costs and intangible assets based in its technical expertise.

Cognizant is often perceived as a back-office enterprise outsourcer, but it has been building out its technical capabilities in more nuanced enterprise IT solutions, such as artificial intelligence services, which we think will better position the firm for future digital transformation demand. While we still see some work to be done for the company to distinguish itself from competitors as a cutting-edge IT service provider, the company’s healthy balance sheet and current strategy should allow Cognizant to further develop and push forward its technical capabilities.

We also think Cognizant’s slow entrance into traditional consulting will be a worthy cause in the long run. While it can be hard to build up initially, we see good synergies for relationship and expertise building that will benefit the business as a whole. Despite historical reluctance to enter consulting more meaningfully and offer cloud solutions, Cognizant has already turned a corner and is on sound footing to benefit from strong digital transformation trends. We expect a long tail of AI-related transformation demand to benefit the IT services industry in reaccelerating growth, even though in the recent past IT budgets have been under a microscope.

Eric Compton, Morningstar director

Baidu

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High
• Industry: Internet Content & Information

Next on our list of the best AI stocks is Baidu, the largest internet search engine in China. Baidu holds more than 50% share of the search engine market there. Outside its search engine, Baidu is a technology-driven company with major growth initiatives in AI cloud, video streaming services, voice recognition technology, and autonomous driving. Baidu shares look 38% undervalued relative to our $146 fair value estimate.

Baidu’s online advertising business accounted for 72% of core revenue in 2023 and will be the main source of revenue in the medium term given its dominant market share for search engines, but we believe unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also AI, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China’s AI development, but whether Ernie will be the long-term leader will depend on execution as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.

While Baidu is transforming its identity by investing in generative AI, cloud, and autonomous driving, commercialized success remains to be seen. There are encouraging signs of its AI cloud monetization growing to 18% of core revenue in 2023 from 12% in 2020. However, despite sharp growth, we expect Baidu to face competition in the cloud from industry leaders Alibaba, Huawei, and Tencent, which all have greater market share than Baidu. Despite a potential total addressable market for autonomous driving that is 9 times its online advertising per management, commercial success is highly uncertain as revenue remains immaterial, and mass scale adoption or time-to-market are unclear.

Its streaming video service, iQiyi, continues to be a margin drag on Baidu’s business owing to a high content cost. The business constantly needs to develop or acquire new content to prevent customer churn. We’re less confident of its outlook than the core product owing to a low barrier to entry and numerous competitors. Membership has remained stagnant at 100 million subscribers for the past five quarters, and therefore we believe long-term growth is limited.

Kai Wang, Morningstar senior analyst

EPAM Systems

• Morningstar Rating: 4-Stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
• Industry: Information Technology Services

This edition of the best AI stocks to buy closes with EPAM Systems, a global IT services firm. Key offerings include engineering, operations, optimization, consulting, and design services. Compared with other IT services firms, EPAM focuses more on digital platform engineering and product engineering than traditional infrastructure management services. EPAM shares look 21% undervalued relative to our $200 fair value estimate.

EPAM Systems is a moaty IT services firm that has ample runway for solid growth and moderate margin expansion ahead. EPAM’s key offerings are engineering, operations, optimization, consulting, and design services. The firm’s deep concentration in engineering services enables it to set itself apart from companies like Accenture or Tata Consultancy Services.

EPAM’s engineering services leverage years of expertise in technological innovation, design, and software engineering to support business optimization through custom enterprise digital applications. The demand for engineering services has accelerated since the coronavirus pandemic, which shed light on the need for a flexible information technology landscape enabled by custom software. Yet we think demand for such services is here to stay, as digital transformation projects and AI-driven solutions require hefty software engineering to lift systems to the cloud and fine-tuning thereafter is inevitable.

EPAM’s bread and butter of engineering services is a more discretionary type of IT enterprise spending. This implies that its mix has proved favorable in good macroeconomic times but more vulnerable in weaker macroeconomic times. Despite challenges in the near term, we expect rising demand for digital transformation consulting to create cross-selling opportunities and drive long-term revenue growth for the core engineering business.

We also believe strategic headcount expansion plays a key role in the firm’s ability to capitalize on these trends. Historically, the firm’s employee base was located primarily in Ukraine, which was a source of competitive advantage. The firm is now increasingly driving employee transitions and amping hiring efforts in growing markets like India and Latin America.

Overall, we think EPAM has carved a distinctive position for itself in the competitive IT services industry. By leveraging its years of expertise in engineering services, the firm is set to capitalize on long-term technological trends and distinguish itself from small and large competitors.

Eric Compton, Morningstar director
Tori Brovet is a content development editor for Morningstar.

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