2 Key AI Stocks to Buy on the Dip

Artificial intelligence (AI) is emerging as one of the most significant investment opportunities in years, potentially even decades. Amazon CEO Andy Jassy stated, "Generative AI may be the largest technology transformation since the cloud (which itself, is still in the early stages), and perhaps since the internet." This affirms the tremendous potential AI holds.

Wall Street's interest in AI has surged, with many companies in this sector experiencing substantial growth over the past two years. However, recent developments have seen a collective dip in stock prices within the industry, largely due to specific challenges affecting the sector. Notably, a China-based company called DeepSeek unveiled an AI chatbot using far fewer resources than the dominant industry players, causing ripples in the market. Moreover, macroeconomic issues, such as trade tensions initiated during former President Trump's administration, could negatively impact various sectors and overall economic activity.

Despite these challenges, the current dip offers a favorable chance to invest in top AI stocks, particularly for those showing promising prospects. Two noteworthy companies to consider are Apple and Microsoft, both part of the so-called "Magnificent Seven" and still solid options for long-term investment despite their staggering market caps approaching $3 trillion.

1. Apple

Although Apple entered the AI landscape later than some competitors, the company has announced plans to integrate a new suite of AI features, dubbed Apple Intelligence, into its recent devices and operating systems. Initial reactions from investors and analysts have been mixed, as the tech giant plays catch-up with others already generating significant revenue from AI initiatives. It's yet to be seen if this will revive sales for the iPhone and other devices.

Historically, Apple has succeeded by refining existing technologies rather than being the first to market with new ideas. The iPhone was not the first smartphone, yet it became immensely popular. The same goes for AirPods and the Apple Watch. Apple's robust ecosystem of 2.35 billion active devices presents numerous monetization opportunities. Coupled with its strong global brand, Apple can attract attention even when its AI initiatives may not be groundbreaking.

Beyond AI, Apple's continued focus on diverse growth avenues, such as its services segment—which now boasts more than a billion paid subscriptions in various industries including fintech—strongly positions the company for long-term success. This growth will bolster its profitability from high-margin services.

Additionally, Apple is an appealing income stock, having increased its dividend by 92% over the last decade while maintaining a conservative cash payout ratio of just 14%. Although Apple's shares are down 12% this year, they remain attractive for long-term holders, especially for those who reinvest dividends, potentially resulting in substantial returns.

2. Microsoft

Microsoft foresaw the lucrative opportunities within AI several years ago and acted by investing in OpenAI, the organization behind the popular AI model ChatGPT. Today, Microsoft offers a comprehensive suite of services through its cloud computing division. The company's cloud unit, Azure, has become a vital growth engine, now enhanced by its AI offerings. In its fiscal second quarter ending December 31, Microsoft reported revenues of $69.6 billion, a 12% increase year-over-year, with Azure's revenue expanding by 31% compared to the same quarter last year.

Management announced that their AI business has achieved an annual run rate exceeding $13 billion, marking an impressive growth of 175% year-over-year. While this number may seem small relative to Microsoft’s overall earnings, it highlights the immense growth potential still available in both AI and cloud technologies.

Moreover, Microsoft holds a dominant position in the computer operating systems market. Its gaming sector is a top contender globally, and its productivity tools remain essential for millions of businesses daily, benefiting from significant switching costs. With a strong brand reputation and a healthy dividend, Microsoft has increased its payouts by almost 168% in the past decade, maintaining a manageable cash payout ratio below 30%. Despite the share price declining by 6% this year, Microsoft offers both growth and income opportunities for investors willing to stay the course.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of a board of directors. Prosper Junior Bakiny has positions in Amazon. Additionally, various financial entities have investment positions in departments of Apple and Microsoft.

AI, Stocks, Investing