Economic productivity and growth will be affected by the AI market. This is a good field for long-term winners, but all new technology has winners and losers. To improve your odds, invest in AI leaders who are profitable and have lots of free cash flow from operations.
Alphabet (NASDAQ: GOOGL) and AI chip pioneer Nvidia (NASDAQ: NVDA) are two examples. These two corporations likely spend the most on AI. Their valuations are low relative to their growth and might yield tremendous profits over the next decade.
1. Nvidia Nvidia shares have risen 254% in the past year due to its GPUs' popularity in AI applications. Other companies are trying to compete with the company's AI chip market domination. New CPUs from Intel and AMD aim to compete with Nvidia, but it's difficult.
Nvidia goes beyond GPUs. Data scientists and AI researchers can use its software, tools, and algorithms to build a platform. This explains its excellent margins, transforming $0.49 of every dollar of revenue into profit. Nvidia's trailing-12-month free cash flow rose to $27 billion last quarter, giving it room to innovate.
Investors doubt Nvidia's longevity. This is why the stock is cheap. A corporation growing earnings at triple-digit rates has a low forward P/E ratio of 38.
Nvidia's time is far from finished. Later this year, it will release the H200 GPU, which improves AI performance over the H100 that is driving its growth. Additionally, management is seeing rising interest from governments worldwide in investing in AI to construct huge language models using their own languages. It might dramatically lengthen Nvidia's growth runway. Nvidia offers everything in AI investments. It's highly lucrative, leads the GPU market, and has a fair stock price.
2. Alphabet (Google) Alphabet shares are up 47% in the past year, outperforming the S&P 500. Holding the stock is justified by its Google Search AI and digital ad initiatives.
Bing is challenging Google's digital ad market dominance. Recent market share declines for Google Search may hurt Alphabet's advertising revenue. Therefore, the stock has a cautious forward P/E of 22, lower than the typical stock. Alphabet has underappreciated data and AI strengths. With billions of YouTube and Google users, the corporation has enough of user data to improve its AI models and the resources to invest.
It will invest billions in new servers and data centers and have $69 billion in free cash flow in 2023. Alphabet will considerably expand spending in 2024 to prepare for growth in AI applications for consumers, advertising, developers, governments, and cloud enterprises.
AI will boost Google Cloud, one of the top enterprise cloud service providers. Alphabet's cloud revenue climbed 26% year over year in the fourth quarter and is starting to profit, which might boost the stock. Alphabet is a safe AI stock due to its financial strength. This stock can be a great core position in a well-diversified portfolio.
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