3 AI-Free Stocks to Buy During the Stock Market Sale

AI stocks have been some of the biggest drivers of the bull market since late 2022. Unfortunately, they have also been some of the biggest losers amid the recent market selloff.

Not every AI-powered company will generate lasting wealth for investors. Some stocks may continue to decline over the long term. But buying the best of the best companies with sustainable competitive advantages in multiple areas should produce excellent returns for shareholders. And if you can buy them on a dip in the share price, as we’ve seen recently, you’ll do even better.

Here are three AI stocks to buy with no problems amid the current market selloff.

Image source: Getty Images.

1. Amazon

Amazon (AMZN -0.30%) is the leading public cloud provider, a critical resource for AI training and development. While the rise of AI has opened the door for competing cloud providers such as Microsoft (MSFT -0.61%) to win new customers, Amazon has been able to maintain itself. Its cloud platform, Amazon Web Services, grew revenue by 19% last quarter, helping it maintain its leadership position.

But Amazon is much more than a cloud computing company. It is the dominant force in e-commerce. Prime membership creates a virtuous cycle for online sales. As more customers sign up, it brings more merchants to market using Amazon’s service network to access Prime delivery. This gives Amazon more money to invest in logistics, enabling faster shipping speeds, increasing the appeal of Prime. Amazon delivered more than 5 billion items to customers’ doorsteps the same day or next day in the first six months of the year.

Amazon is also the third largest digital advertising company in the world. It surpassed the $50 billion run rate in the second quarter, up 20% year over year. High margin revenue has become a significant source of profit for the company as the retail business maintains very thin margins.

Amazon goes through investment and scaling cycles to capitalize on its investments. Each cycle results in the generation of more and more free cash flow. The latest efforts paid off with $53 billion in free cash flow over the past 12 months. Even with its AI investments, Amazon is poised to continue growing cash flow for some time as it dials back its fulfillment center expenses. The stock is currently trading near a high 10-year free cash flow yield, making it attractive at this price.

2. Microsoft

Microsoft is the fastest-growing hyperscale cloud provider, but its 29% growth last quarter in Azure, its cloud platform, still managed to disappoint Wall Street’s high expectations. The sale could be an excellent opportunity for long-term investors. That’s because, despite strong growth in recent years, management expects Azure’s revenue to accelerate in the second half of the year.

Microsoft has invested heavily in AI. Since adding $10 billion to its OpenAI investment in early 2023, Microsoft has spent billions building data centers and buying the chips needed to power its servers. But while that capital spending has begun, Microsoft needs time to deploy all those chips and get its servers up and running and ready for Azure customers. As additional capacity comes online, Microsoft expects to have no problem finding demand.

Microsoft has become a top source for AI-focused developers, and its own consumer and enterprise AI services, which it calls Copilot, have also seen good traction. Management says the Copilot customer base grew 60% sequentially in the last quarter. Given that there are more than 400 million Office 365 customers, there is also a long way to grow.

Microsoft stock isn’t cheap by any valuation standard. The enterprise value is more than 10 times analysts’ sales estimates for next year. P/E before almost 31 is way over S&P 500 average, not to mention its own historical rating over the last 15 years. But Microsoft is growing faster than it has in a long time and has a long growth runway ahead of it, justifying the premium valuation.

3. Adobe

Adobe (ADBE -0.13%) is well known for its creative software suite, which includes designer basics like Photoshop, Illustrator, and Lightroom. Last year, the company introduced new generative AI features powered by its Firefly model. Firefly was trained on Adobe’s proprietary data, including its stock image library. Firefly features include generative fill and generative stretch in Photoshop, text to vector in Illustrator, and object removal in Lightroom.

These new features have helped Adobe attract and retain users over the past year. Additionally, it manages to force free users of Adobe Express to sign up for the paid subscription, and paid subscribers to pay more for greater access to AI features. The result is a return to growth in its core value, annualized recurring income. ARR beat analysts’ expectations last quarter to $487 million, and management provided strong guidance for the current quarter.

Adobe is looking to repeat its performance in the creative suite with Document Cloud (Acrobat) and its marketing platform. New AI tools help automate and generate results for users, which could lead to increased subscriptions and higher subscription revenue per user in the future.

While generative AI has brought many new creative design tools to market, Adobe benefits from a strong network effect as an industry standard. Any designer looking for work needs to be well-versed in Adobe software, and any company looking for design work also needs access to Adobe tools. This creates a virtuous cycle that will make it difficult to dismantle Adobe.

Adobe stock is currently trading at an enterprise value-to-earnings ratio of about 11, below its 10-year average. Also, the forward PE around 27 is below its historical average and very attractive given the growth prospects. That makes it a great stock to buy amid the selloff.