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Global AI startup investments have tripled since 2020, going from $30 billion to $91.9 billion in 2022. But as we near the end of the year, AI deals suffered a slowdown. This follows a larger capital consolidation trend.

Per the CB Insight report for Q3 2023, global venture funding of $64.6 billion represents an 11% increase from the prior quarter. However, 6,111 venture deals marked the lowest quarterly level since 2016. Yet, AI is the star of the investment show. 

June’s PitchBook and Collision survey showed that 74% of investors committed to at least one artificial intelligence (AI) venture in the last 18 months. As the main supplier of chips for generative AI apps, Nvidia (NVDA) has reaped the benefits, going up 236% year-to-date.

But which other stocks provide a strong AI exposure?

International Business Machines (NYSE: IBM)

People often think of OpenAI at the sector’s forefront when they hear about AI. However, IBM has occupied that position for decades. Thanks to IBM’s research on large language models (LLMs), the company paved the road to ChatGPT and other pre-trained transformer models.

Open Neural Network Exchange (ONNX), PyTorch Lightning, JAX, and TensorFlow are just some of the tools and libraries IBM made open-source to usher in the AI revolution. While most AI startups are yet to go public, IBM has created its own ecosystem of commercialized AI products.

This includes consulting, selling proprietary AI apps and solutions (WatsonX), cloud services and licensing AI models. In Q3 earnings, IBM reported a 6% revenue increase from data/AI services, with the consulting division alone generating $4.96 billion in sales. For the quarter, the company beat earnings per share, at $2.20 vs 2.13, and revenue at $14.75 billion vs estimated $14.73 billion.

On top of that, IBM absorbed multiple AI startups to boost its hybrid cloud AI, such as Databand.ai and StepZen. In November, IBM became even more aggressive with expansion, launching a $500 million enterprise AI venture fund.

Given this strong AI pedigree, the blue-chip IBM stock is a “buy” based on 11 analyst inputs pulled by Nasdaq. The average IBM price target is $149.75 vs the current $155.54. The high estimate is $179, while the low forecast is $130 per share.

Meta Platforms (Nasdaq: META)

The parent company of Facebook, WhatsApp, and Instagram has the deepest customer pool of all social media companies. Altogether, the company serves 3.81 billion monthly active people (MAP). While Mark Zuckerberg’s cryptocurrency plan to leverage those figures flopped, AI is the new market frontier.

Meta Platforms is undergoing an AI-powered facelift. This includes improved ad targeting for better conversion rates, personalized user content, fraud detection, and the development of new AI products. Since 2020, Meta has acquired half a dozen AI startups, such as Graphcore, Within Unlimited, Wit.ai and Kustomer.

Of particular note is Inworld AI, which Meta partly funded in November 2021 to populate virtual worlds with AI agents. This fits into Meta’s virtual reality (VR) and evolving metaverse ecosystem. While Reality Labs continues to drain Meta’s coffers, the focus is slowly shifting to AI tools.

“AI tools for advertisers are also driving results with Advantage+ shopping campaigns, reaching a $10 billion run rate,” 

Meta CFO Susan Li, Q3 2023 earnings report

Year-over-year, Meta boosted its revenue by 23% to 34.1 billion. Most notably, the social media giant doubled its operating margin from 20% to 40%, indicating ever more streamlined operations, which AI will likely increase even more.

Based on 41 analyst inputs pulled by Nasdaq, META is a “strong buy.” The average META price target is $386.06 vs the current $339.74. The high estimate is $435, while the low forecast is $332 per share.

Microsoft (Nasdaq: MSFT)

Last week, it looked like Microsoft would acquire OpenAI without paying anything for its $80B – $90B valuation. Even with Sam Altman back at the CEO’s helm, Microsoft is still one of the best-positioned AI exposures.

Although Microsoft, IBM, and Meta are heavily invested in AI, Microsoft occupies the strongest position due to its dominance of Windows and Office software. With the recently launched Office 365 Copilot, at monthly $30 per user, it is the first fully commercialized large-scale AI product deployment.

This is in addition to Bing’s Image Creator, integrating DALL-E as the most powerful text-to-image generator yet. In Q3, Microsoft’s Azure cloud service showed greater growth than even Google. 

At this rate, MSFT may even become a more valuable stock than AAPL, Warren Buffet’s favored stake. Based on 40 analyst inputs pulled by Nasdaq, MSFT is a “strong buy.”

The average MSFT price target is $409.86 vs. the current price of $379.60. The high estimate is $450, while the low forecast is $375 per share.

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