The recent market decline is providing an opportunity for even the smallest investors to consider acquiring some of the best stocks in artificial intelligence (AI).
In recent years, AI stocks have significantly contributed to the impressive performance of the S&P 500, particularly in 2023 and 2024. However, these same stocks have also posed challenges for stock market returns in 2025.
Many top AI stocks have experienced price reductions, yet not all are currently worthy of investment. The sell-off, however, has presented astute investors with more attractive entry points for several market leaders in sectors like cloud computing, software, and semiconductors.
For those who missed the initial AI boom, there is still time to invest. With just $400, investors can begin by focusing on three promising stocks.
1. Microsoft
Microsoft, a long-time supporter of OpenAI, found itself in a favorable position in late 2022 as generative AI began to flourish. Its collaboration with OpenAI propelled its cloud computing platform, Azure, to become a leading destination for developers. Azure has driven significant growth for Microsoft, with the segment’s revenue increasing by 31% in the most recent quarter, boosted by a 157% year-over-year rise in AI services. OpenAI remains a major customer, committed to using Microsoft’s cloud services through 2030.
Azure’s revenue is poised to increase in the second half of fiscal 2025 as capital investments begin to yield results. Microsoft management highlighted the robust demand for its offerings, outpacing available capacity, portending strong revenue and potentially higher operating profits.
Microsoft’s enterprise software division is also reaping AI benefits. Its Copilot-branded AI agents aid in software development and enhance productivity tools. The company offers customers the ability to create customized Copilots using proprietary data and OpenAI models, contributing to strong revenue growth in its productivity segment.
Following the market downturn, Microsoft’s shares are priced at approximately $370. Investors can buy shares at an attractive forward price-to-earnings ratio of 28. Microsoft stands as a cash-generating leader in AI, utilizing excess free cash flow for share repurchases, which supports earnings-per-share growth and maintains its premium valuation.
2. Adobe
Contrary to concerns, Adobe sees AI as an opportunity rather than a threat. Known for its leading creative software and marketing tools, Adobe has developed its AI model, Firefly, leveraging its stock photo and video libraries. Firefly is described as "commercial-safe," distinguishing it from models trained on potentially copyrighted material.
Adobe has integrated AI features into its products, such as Generative Fill in Photoshop, which has allowed for service price increases and improved retention, boosting annual recurring revenue. AI-related revenue reached over $3.5 billion by the end of 2024.
Management foresees revenue reaching $30 billion in three years, up from $21.5 billion in 2024, reflecting a compound annual growth rate of 12%. Consistent share repurchases are expected to drive strong earnings-per-share growth.
Currently trading at 17 times forward earnings, Adobe offers great value for its projected earnings growth. Concerns over competition from AI-powered creative tools may be affecting the stock, but Adobe’s high switching costs and attractive user entry points suggest a promising investment landscape.
3. Applied Materials
Applied Materials plays a crucial role in semiconductor production, essential for AI training and inference. As the largest supplier of wafer fabrication equipment globally, it benefits from substantial revenue enabling considerable investment in research, further advancing its equipment capabilities. This advantage allows Applied Materials to consistently capture market share in the burgeoning demand for AI accelerator chips.
Semiconductor manufacturers face high switching costs, as transitioning to a new supplier involves significant financial and operational expenses. This factor, coupled with Applied Materials’ leadership in advanced tooling, provides a solid moat in the industry.
Management does not consider tariffs a significant threat, evidenced by a recent 15% dividend increase and substantial share repurchase plans. This suggests expectations of continued free cash flow growth, catering to ongoing demand for advanced chip designs.
After a considerable stock decline in 2025, Applied Materials now trades under $140 per share. With a forward P/E of 14.8, investors could acquire several shares with $400, benefiting from a robust position in a growing market.
