AI Stocks: Where next for profit?

Artificial intelligence has become the most crowded investment theme of the decade. From Nvidia’s blockbuster earnings to Microsoft’s multibillion-dollar cloud spend, AI is pitched as nothing less than a new industrial revolution. But for investors, the question is deceptively simple: should you chase the giants in the U.S., sift through speculative names on the ASX, or hunt for opportunities in the UK after its landmark tech deal with Washington?

What AI stocks are available in Australia to buy?

The Australian market has no equivalent of Nvidia or OpenAI, but it does have a handful of listed companies exposed to AI’s rise.

• NextDC (ASX: NXT), the data-centre operator, is perhaps the most direct infrastructure play. Its revenues topped A$420 million last year, with enviable gross margins around 80%. But despite positive EBITDA, the company still posts net losses, and trades on lofty multiples — enterprise value to revenue above 20x. Investors are paying for aggressive growth, and any slowdown in demand for compute or spike in energy costs could squeeze returns.
• Appen (ASX: APX), once the darling of AI data annotation, illustrates the risks of being too close to the hype cycle. Its intrinsic value is estimated at less than half its current market price by some analysts, and its Altman Z-score signals financial fragility. Unless Appen can pivot decisively into generative AI data services, investors may find themselves holding a structurally challenged business.
• BrainChip (ASX: BRN) has its neuromorphic chips, and Megaport (ASX: MP1) sells the network pipes that enable cloud and AI data flows. Both are more speculative, with BrainChip still pre-profit and Megaport exposed to competition from global giants.

In short: ASX investors can buy into the AI theme, but these are niche, high-beta bets. They are more lottery ticket than reliable compounding machine.

Are AI stocks in the US too high?

Across the Pacific, the AI narrative is dominated by the U.S. titans. Nvidia, Microsoft, Alphabet, and Amazon not only build the chips and models but also control the cloud infrastructure. Their earnings growth is real – Nvidia’s revenue tripled year-on-year – but so are their valuations.

Many now trade at levels reminiscent of the dot-com boom: price-to-earnings multiples stretched, expectations set sky-high. Investors buying today are effectively betting that AI will transform not just technology, but every industry, and that these companies will capture the lion’s share. That may well happen. But perfection is priced in – and any stumble could mean sharp corrections.

Still, if you want exposure to the core of AI, U.S. stocks remain the most direct and credible option. The risk is timing.

Keep abreast of AI developments in the UK

The overlooked middle ground may now be the UK. In September, the U.S. and UK unveiled a £31 billion Tech Prosperity Deal during Donald Trump’s London visit. Microsoft pledged £22 billion for AI and cloud infrastructure, Nvidia promised up to 120,000 GPUs, and a new AI “growth zone” is set for the North East of England.

For UK investors, that means a structural tailwind. Companies that can plug into this infrastructure – data-centre operators, software firms with government contracts, or AI startups clustered around London and Cambridge — may see valuations rerated.

Publicly, names like Kainos Group (LSE: KNOS), which builds AI-enabled digital services for healthcare and government, already generate consistent profits (~£49 million net income). IQE (LSE: IQE), a semiconductor materials producer, is positioned to benefit from rising chip demand. Smaller firms like Pinewood Technologies are more niche but show profitability.

The bigger UK AI names – Synthesia, Quantexa, Stability AI — remain private for now, but the infrastructure spillover should support listed firms across IT services, semiconductors, and data. For investors frustrated with the volatility of ASX micro-caps and the valuations of U.S. megacaps, the UK offers a compelling “third way.”

AI-themed ETFs are easier than buying AI stocks

For those unwilling to stock-pick across continents, AI-themed ETFs offer diversified exposure.

Want AI explosure – which countries to target?

• ASX names are thinly traded, high-risk plays with upside if they catch the AI wave, but fragile balance sheets make them speculative.
• U.S. leaders are the safest way to play AI, but valuations are rich and leave little room for error.
• UK stocks now sit in an interesting sweet spot: not as inflated as Wall Street, yet about to benefit from a flood of U.S. investment and sovereign AI infrastructure.

For many investors, the answer may be a barbell strategy: anchor portfolios in U.S. megacaps or AI ETFs for stability, while taking selective exposure to UK names that stand to benefit from the new deal. ASX stocks? Keep them on the speculative end of the portfolio.