The past several weeks have been challenging ones for the overall market. But they’ve been downright miserable ones for most artificial intelligence (AI) stocks. Microsoft shares are down more than 20% from last year’s peak, for instance, while Broadcom is off by more than 10%. Oracle (NYSE: ORCL) shares have been cut in half on concerns of ramped-up AI infrastructure spending that may or may not pay off.
What gives? Simply put, investors have gotten a wake-up call about AI’s cost, and value. It’s not living up to the hype. The technology’s leading tickers are being repriced to reflect this reality.
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But don’t give up on the AI revolution just yet. You should be viewing this lull as a long-term buying opportunity, in fact. This headwind is just the next predictable stage of a psychological cycle that most investors have seen over and over again.
The particular stage that AI is in right now — called the “trough of disillusionment” — reliably precedes a recovery that’s bullish for most of any industry’s top stocks.
Technology market research and consulting company Gartner recognized and formalized what’s now commonly known as the Gartner Hype Cycle. It consists of five stages that most new technologies put their underlying companies though (along with their stocks). The five sequential stages from beginning to end are:
Innovation Trigger: A new technology is developed, and it works, even if there’s no clear marketable use for it.
Peak of Inflated Expectations: The need for the technology in question starts becoming clear, generating a great deal of excitement — and investment.
Trough of Disillusionment: As it turns out, while the tech has its place, there’s obviously less immediate opportunity than the initial hype implied. Some related companies start to falter.
Slope of Enlightenment: The cost of the tech comes down, its functionality and purpose grow, and the remaining companies start turning it into a practical, marketable business.
Plateau of Productivity: The industry stabilizes as the underlying technology becomes commonplace. Unprofitable players have bowed out, leaving the viable ones in place.
And whether they realize it or not, veteran investors have seen this cycle play out many, many times. Virtual reality, solar panels, voice-over-internet protocol (VoiP), 3D printers, and speech recognition are just some of the technologies that were all the rage in their infancy. Then the hype cooled when reality set in. Now, all of these are quietly the basis of viable businesses.
Image source: Getty Images.
The grandmother of all examples of an industry going through the Gartner Hype Cycle, of course, is the dot-com boom in the late 1990s followed by the dot-com crash of 2000. Plenty of those companies are no longer around. The survivors, however, are the cornerstones of the internet.
When framed and explained like this, it becomes clear that AI is indeed in the midst of its trough of disillusionment. There’s little doubt that the world will use AI in the future. However, there’s also no denying that it hasn’t demonstrated real value everywhere it was expected to — the “disillusionment.”
The results of a recent survey from the National Bureau of Economic Research put things in perspective, indicating that over 80% of the 6,000 chief financial officers and chief executives polled reported that AI was making no net-positive impact on employee productivity. Why continue investing in it if it doesn’t matter?
There is a reason, though. It’s what comes next on Gartner’s list: the slope of enlightenment, when those CFOs and CEOs begin to realize what AI isn’t good for, and what it is good for. Most office workers probably don’t need access to their own digital assistant. But artificial intelligence is arguably ideally suited for duties like cybersecurity, forecasting, and creating or editing digital images.
With this in mind, which AI stocks are the ones investors should be buying in front of the looming enlightenment phase? The aforementioned Oracle is arguably one of them. Although the company has predominantly been a provider of remotely accessed databases for the majority of its existence, its shift to specifically serve the AI market is a promising one. Based on business that’s already been lined up, management expects its AI infrastructure revenue to swell from $18 billion this year to $144 billion in 2030. That’s almost three times the top line Oracle reported for all of last fiscal year.
Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is another AI name to consider buying here. This stock has been one of the few to (mostly) defy the bearish headwind resulting from the technology’s stumble into the trough of disillusionment.
Artificial intelligence isn’t even close to being Alphabet’s biggest business, for the record. That’s still the search engine Google, and all of its ancillary profit centers like Gmail or Google Docs. The cloud computing arm where the company’s AI business is reflected only accounted for 15% of last year’s revenue and operating income.
Alphabet’s cloud unit is the company’s fastest-growing segment, however, because of AI. And the business is arguably better positioned than any other to capture whatever growth awaits artificial intelligence now that the world is willing and able to use it in ways that make sense.
For instance, while ChatGPT by far remains the world’s most-used AI-powered chatbot, Statcounter reports Google’s Gemini is the one gaining the most ground on the market leader largely thanks to its enterprise-focused capabilities. At the same time, Google Docs continues to displace Microsoft Office as a go-to productivity software platform. Google Cloud is outgrowing all of its competitors within the cloud computing arena as well, according to numbers from Synergy Research Group.
This ever-deepening reach into the business world leaves Alphabet well positioned to capitalize on the impending slope of enlightenment, which is apt to be far more focused on the institutional and enterprise-level customers that Google is already serving.
It’s also arguable that Alphabet is going to make it incredibly easy for institutions to use quantum computing when that tech is ready for commercialization.
Or if you’re looking for something a little bit off the radar, Recursion Pharmaceuticals (NASDAQ: RXRX) is using artificial intelligence to virtually discover and develop new drugs, while UiPath (NYSE: PATH) specializes in computerized workflow automation. Both are worth at least adding to your long-term watch list.
The one AI name that’s arguably not worth scooping up here in the trough of disillusionment? Surprisingly enough, it’s the aforementioned Microsoft. Although it’s still a powerhouse, it’s not demonstrating superiority in any aspect or sliver of the AI business — at least not yet. But being dominant is a key ingredient for a high-performing stock in any industry.
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James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Microsoft, Oracle, and UiPath. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
Prediction: The “Trough of Disillusionment” Will Create the Best Buying Opportunity for Artificial Intelligence (AI) Stocks in 2026 was originally published by The Motley Fool
