The artificial intelligence (AI) market will have a significant impact on economic productivity and growth. It’s a ripe field to find long-term winners, but like any new technology, there will be winners and losers. A simple criteria for stacking the odds is to invest in AI leaders that are profitable and generate significant free cash flow from their operations.
The first two that come to mind are AI chip leaders. Nvidia (NASDAQ:NVDA) and Google’s parent alphabet (NASDAQ:GOOG) (NASDAQ:Google). Perhaps no other company is investing as much in AI technology as these two. The company’s current valuation looks cheap relative to its growth, and could deliver impressive returns over the next decade.
1. Nvidia
NVIDIA’s stock price soared 254% last year as Nvidia’s powerful graphics processing units (GPUs) are in high demand for AI-based applications. The company’s dominance in the AI chip market has other companies vying for a piece of the pie. intel and Advanced Micro Devices Companies are launching new chips that they hope will compete with Nvidia, but that’s easier said than done.
Nvidia is more than just a GPU company. We also provide software, systems, and algorithms that create a service platform for data scientists and AI researchers. This is why we convert $0.49 of every $1 in revenue into profit, earning us extremely high margins. Nvidia’s free cash flow ballooned to $27 billion on a 12-month basis last quarter, providing enough funding to invest in further innovation.
Some investors are wondering how long Nvidia’s reign will last. As a result, the stock trades at a relatively low valuation. The company’s forward price/earnings ratio (P/E) is 38 times, which is quite low for a company whose earnings are growing at a triple-digit pace.
But Nvidia’s rise isn’t over yet. Later this year, the company plans to start shipping its new H200 GPU, which offers a quantum leap in AI performance over the H100 and is fueling the company’s current growth. Additionally, management recognizes growing interest from governments around the world who want to invest in AI to build language models at scale using their own languages. This could significantly extend Nvidia’s growth runway.
Overall, Nvidia has everything you need for an AI investment. The company is making huge profits, dominates the GPU market, and its stock is reasonably valued relative to its future prospects.
2. Alphabet (Google)
Alphabet’s stock price has risen 47% over the past 12 months, outpacing the company’s stock price increase. S&P500 index. The company’s investments in AI for Google search and digital advertising businesses are big reasons to consider owning the stock.
Although Google is the leader in the digital advertising market, it faces competition from Google. microsoftThis is Bing. Google search has lost market share in recent years, which could weigh on Alphabet’s ad revenue growth. For this reason, the stock’s future P/E ratio is conservatively estimated at 22x, which is lower than the average stock.
But Alphabet has underappreciated strengths in data and AI. With billions of users on YouTube and Google, the company has tons of user data to make its AI models smarter, and the resources to keep investing.
The company plans to invest billions of dollars in new servers and data centers and grow its free cash flow to $69 billion in 2023. Alphabet plans to significantly increase spending in 2024 as it prepares for growth opportunities to deliver more AI applications for individual users, advertisers, developers, governments and enterprises. and cloud company customers.
Speaking of cloud, AI will have a big impact on the growth of Google Cloud, one of the largest cloud service providers for enterprises. Alphabet’s fourth-quarter cloud revenue rose 26% year-over-year, and the division is starting to turn a profit, which could benefit the stock.
Alphabet has very strong financial strength and is relatively safe as an AI stock. This is a solid choice to serve as a core holding in a well-diversified investment portfolio.
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Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. John Ballard holds positions at Advanced Micro Devices and his Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: Long January 2023 $57.50 call on Intel, Long January 2025 $45 call on Intel, Long January 2026 $395 call on Microsoft, Short January 2026 $405 call on Microsoft. call, and a May 2024 $47 short call. Intel. The Motley Fool has a disclosure policy.
2 Top Artificial Intelligence Stocks to Buy Now was originally published by The Motley Fool.
