You can build tremendous wealth over time in the stock market, but it's helpful to swim with the tide, not against it. Investing in fast-growing industries can stack the odds in your favor. Artificial intelligence (AI) is one of the most promising arenas for outstanding stocks right now.
Here are two leaders in AI hardware and software that could deliver significant gains over the long term.
1. Nvidia
The volume of data being accumulated around the world has exploded over the last decade. It's only going to increase substantially with data centers requiring more data to train AI models. As a result, Nvidia's (NASDAQ: NVDA)graphics processing units (GPUs) have been in high demand in recent years, and its momentum is set to continue.
Nvidia's revenue more than doubled year over year last quarter to $30 billion. Most of that is 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 key driver of shareholder returns.
Data centers will continue to upgrade their hardware to keep up with the development of new AI models, which will require exponentially more computing power. Dell'Oro Group forecasts data center spending to increase by 35% in 2024 and continue growing next year. An important 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 command high margins. Because Nvidia controls most of the market for AI accelerators, or advanced GPUs, it is experiencing tremendous earnings growth. Analysts expect the company's earnings to increase 139% this year before growing another 43% next year.
The chip industry can occasionally experience weak demand, but investors who hold Nvidia shares for the long haul should see excellent returns. The stock's forward price-to-earnings ratio of 34 on next year's consensus earnings estimate is not expensive relative to Nvidia's earnings growth potential.
2. C3.ai
While Nvidia has you covered on the hardware side, C3.ai(NYSE: AI) can help you profit from the growing demand for enterprise AI software. The company's generative AI applications are used by organizations across several industries, including the U.S. Marine Corps.
C3.ai has posted accelerating revenue growth over the last year. Revenue grew 21% year over year in the most recent quarter and has improved for six straight quarters. The company is seeing momentum from local governments, with a number of agreements closed last quarter with municipal, local, and state agencies. Its customer base continues to expand, with C3.ai partnering with Latin America's largest power and transmission company to improve data analytics and manage what is considered one of the most complex power grids in the world.
The negative for C3.ai is weak profitability. Unlike its competitor Palantir Technologies, C3.ai is not showing a profit yet. That's because Palantir is a larger business with more annual revenue to offset expenses. In fiscal Q1 ending July 31, C3.ai's adjusted net loss per share was $0.05, but the loss has narrowed. The company generated a positive free cash flow of $7 million last quarter.
The positive is that Wall Street is undervaluing C3.ai's earnings potential. The shares trade at a price-to-sales ratio of 10, compared to 40 for Palantir. If C3.ai improves margins, the stock could deserve a higher P/S multiple and accelerate the share price.
On that note, management expects revenue growth to exceed expense growth over the long term, which should lead to improving profits as the business expands. This potential is not reflected in the current share price. Adding this up, C3.ai investors are getting solid value on the shares compared to what the company could be worth and could see significant gains over the next decade.
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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
