These AI leaders continue to experience high demand for their services.
You can build enormous wealth over time in the stock market, but it helps to swim with the current and not against it. Investing in high-growth industries can increase the odds in your favor. Artificial intelligence (AI) is currently one of the most promising arenas for outstanding stocks.
Here are two leaders in AI hardware and software that could deliver significant gains in the long term.
1. Nvidia
The amount of data collected around the world has exploded over the past decade. This will only increase substantially as data centers require more data to train AI models. As a result Nvidia‘S (NVDA 0.89%) Graphics processing units (GPUs) have been in high demand in recent years, and this momentum is expected to continue.
Nvidia’s revenue more than doubled year-over-year last quarter to $30 billion. Most of that comes from data centers, while Nvidia is still a major player in gaming and professional graphics. These smaller segments also posted double-digit revenue growth last quarter. However, the future of the data center market will be the main driver of shareholder returns.
Data centers will continue to upgrade their hardware to keep pace with the development of new AI models, which will require exponentially more computing power. Dell’Oro Group predicts that data center spending will increase by 35% by 2024 and continue to grow next year. A key catalyst will be the adoption of Nvidia’s Blackwell GPU platform for AI workloads.
Nvidia’s data center GPUs sell for thousands of dollars and have high margins. Because Nvidia controls the majority of the market for AI accelerators, or high-end GPUs, it is experiencing massive earnings growth. Analysts expect the company’s profits to rise 139% this year, before growing another 43% next year.
The chip industry may experience weak demand at times, but investors who hold Nvidia stock for the long term should see excellent returns. The consensus forward price-to-earnings ratio of 34 for next year is inexpensive relative to Nvidia’s earnings growth potential.
2. C3.ai
While Nvidia has you covered on the hardware front, C3.ai (AI -0.92%) can help you capitalize on the growing demand for business AI software. The company’s generative AI applications are used by organizations across industries, including the U.S. Marine Corps.
C3.ai has achieved accelerated revenue growth in the past year. Revenue grew 21% year-over-year in the most recent quarter and has improved six quarters in a row. The company is seeing momentum in local governments, with a number of agreements signed with municipal, local and state agencies last quarter. Its customer base continues to grow, with C3.ai working with Latin America’s largest energy and transmission company to improve data analytics and management of what is considered one of the most complex electricity grids in the world.
The negative for C3.ai is its weak profitability. Unlike its competitor Palantir TechnologiesC3.ai is not yet showing a profit. That’s because Palantir is a larger company with more annual revenue to offset its costs. In the first fiscal year ended July 31, C3.ai’s adjusted net loss per share was $0.05, but the loss has narrowed. The company generated positive free cash flow of $7 million last quarter.
On the bright side, Wall Street is undervaluing C3.ai’s earnings potential. The stock trades at a price-to-sales ratio of 10, compared to 40 for Palantir. If C3.ai improves margins, the stock could earn a higher P/S multiple and accelerate its share price.
In that regard, management expects long-term revenue growth to outpace cost growth, which should lead to better profits as the company grows. This potential is not reflected in the current share price. Putting this together, C3.ai investors are getting solid value for the stock compared to what the company could be worth and could see significant gains over the next decade.
John Ballard has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
