Important points
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The artificial intelligence industry is growing, but not all AI stocks are destined for extraordinary returns.
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Technology infrastructure is one of the areas that is rapidly expanding thanks to AI.
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For AI software companies, long-term success depends heavily on the strength of their economic moat.
The current artificial intelligence (AI) craze began with the debut of OpenAI’s ChatGPT towards the end of 2022. In the years that followed, it looked as if any company that could reasonably tout its connection to the AI trend could see its stock price skyrocket. Those days are coming to an end.
This may seem hard to believe, considering the industry’s value is projected to skyrocket from $255 billion in 2025 to $1.7 trillion by 2031. Growth like this means investing in AI stocks is a good move. However, while some areas of the AI market are experiencing rapid growth, other areas have more uncertain long-term growth opportunities.
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Therefore, investors need to be cautious when choosing AI stocks. Let’s take a closer look at the artificial intelligence industry to help you build an investment portfolio that provides reliable returns over the long term.
Image source: Getty Images.
A strong case for AI infrastructure stocks
One of the hottest areas of AI right now is technology infrastructure. Jensen Huang CEO Nvidia(NASDAQ:NVDA)predicts this will happen in 2024, saying, “Companies and countries are partnering with NVIDIA to build a new type of data center: an AI factory, to move trillions of dollars of traditional data centers to high-speed computing and produce a new commodity: artificial intelligence.”
AI systems are powered by data centers, but older facilities are not designed to support the technology, especially as it becomes more sophisticated, such as the rise of agent AI. As a result, new AI-optimized data centers are being built. Some will be as large as a city to support the massive computational needs of AI.
Because of their size and complexity, these data centers require fast, reliable components such as: Credo Technology Group(NASDAQ:CRDO) and Astera Research Institute(NASDAQ:ALAB). Therefore, investing in businesses that support building AI factories is a great way to benefit from this growth.
Nvidia, a semiconductor chip design company, is one of them. That’s because the company’s famous graphics processing units (GPUs) remain in high demand to provide processing power to AI systems. The company posted record sales of $57 billion in the fiscal third quarter of 2026, which ended Oct. 26, an impressive 62% year-over-year increase.
Fortune Business Insights predicts that the AI infrastructure market will grow from $46 billion in 2024 to $356 billion by 2032, providing a multi-year tailwind for companies in this space. This includes energy companies that power large AI data centers.
A good way to take advantage of these trends is through exchange-traded funds (ETFs). For example, First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ:Grid)has a portfolio of companies in power grids and related sectors such as energy storage and management.
Results for AI software are mixed.
ETFs are a great way to diversify your portfolio. This is an important safeguard against risk, especially for software companies, as AI is not likely to provide sustainable business growth. For software-focused organizations to have long-term success with AI, their technology must be better than what their competitors offer and provide an economic moat.
for example, Palantir Technologies(NASDAQ:PLTR) We provide AI software to the U.S. government. that’s right BigBear.ai(NYSE:BBAI). However, while Palantir’s third quarter government sales increased 52% year over year to $486 million, BigBear.ai’s third quarter sales fell 20% to $33.1 million, largely due to the Trump administration’s spending cuts.
Palantir has grown thanks to a unique ontology that enables AI software to deliver real-world results. Palantir’s performance compared to BigBear.ai illustrates why not every AI software company is a winner as technology evolves toward artificial general intelligence (AGI), a still-theoretical level where AI systems can reason as efficiently as humans.
Technologies supporting the future of AI
According to OpenAI CFO Sarah Friar, AGI is “at a stage where AI systems can take on the majority of the world’s value-added human jobs. And we’re getting closer to that.” Getting to that level will require more computing power. This is why the next frontier in AI could be in quantum computing companies.
Quantum computers take advantage of the unique properties of quantum mechanics to process data in a fundamentally different way than classical computers operate. As a result, it is possible, in principle, to solve certain unusual types of highly complex calculations in minutes that would take centuries to complete on today’s supercomputers. This technology has the potential to provide the computational infrastructure needed to support AGI, but the industry is still in its infancy and there are significant hurdles to overcome.
For example, the qubits at the heart of quantum computers are delicate and much more prone to errors than traditional computers. The challenge of reducing the number of errors that occur and effectively recognizing and correcting those that do occur are the main challenges faced by all players in this field. One of the strong candidates IBM(NYSE:IBM)says that by 2029 they plan to deliver fault-tolerant quantum computers, that is, quantum computers with low enough error rates and sufficiently robust error correction capabilities to be truly useful. The arrival of such a machine would pave the way for widespread adoption of this technology.
IBM’s overall sales were strong, increasing 9% year over year to $16.3 billion in the third quarter. It has also increased its dividend every year for 30 consecutive years, making it a reliable source of passive income.
Nvidia is also playing a role in this area of AI. The company’s NVQLink platform acts as a bridge between quantum computers and traditional supercomputers, helping address challenges such as error correction. Given Nvidia’s involvement in so much of the AI pie, it will be an important artificial intelligence stock to own in 2026 and beyond.
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Robert Izquierdo has held positions at International Business Machines, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends International Business Machines, Nvidia, and Palantir Technologies. The Motley Fool recommends Astera Labs. The Motley Fool has a disclosure policy.
