The rapid expansion of artificial intelligence (AI) lit a blazing fire under many tech stocks. The biggest winners so far are foundational companies like Nvidia(NASDAQ: NVDA) and Microsoft. Nvidia supplies the high-end data center GPUs for processing complex AI tasks, while Microsoft owns a major stake in ChatGPT's creator OpenAI.
Over the past five years, Nvidia's stock soared 2,590% as companies scrambled to upgrade their servers with its new GPUs. Microsoft's stock more than tripled as it integrated more of OpenAI's tools into its growing cloud ecosystem.
Image source: Getty Images.
Both of those AI bellwether stocks are still reliable long-term investments, but investors shouldn't gloss over the less obvious AI plays that might soar higher over the next few years. Let's take a closer look at three of those companies: Oracle(NYSE: ORCL), Broadcom (NASDAQ: AVGO), and Arm Holdings (NASDAQ: ARM).
1. Oracle
Oracle is one of the world's largest database software companies. That's a mature market, but it fired up some new growth engines over the past decade by transforming its on-premises software into cloud-based services. It also expanded its cloud ecosystem with more enterprise resource planning (ERP) services and strengthened its cloud infrastructure platform.
Oracle profits from the AI market's growth in two ways: Its database software aggregates a lot of the data that needs to be processed by AI applications, and its cloud infrastructure platform supports the growing storage and computing needs of those demanding applications. The company already generated 42% of its revenue from its cloud-based software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) platforms in its latest quarter. It expects its IaaS revenue, which already surged 50% in fiscal 2024 as the AI market expanded, to accelerate again in fiscal 2025.
From fiscal 2024 to fiscal 2027 (which ends in May 2027), analysts expect Oracle's revenue to grow at a compound annual growth rate (CAGR) of 12% as its earnings per share (EPS) increases at a CAGR of 21%. Its stock might not seem like a bargain at 31 times next year's earnings, but its ongoing expansion should support that higher valuation.
2. Broadcom
Broadcom is a diversified semiconductor and infrastructure software giant that evolved and expanded through big acquisitions. Its semiconductor business produces chips for the mobile, data center, networking, wireless, storage, and industrial markets, while its newer infrastructure business grew rapidly over the past six years by acquiring CA Technologies in 2018, Symantec's enterprise security division in 2019, and the cloud software giant VMware last November.
Broadcom's sales of networking, optical, and custom accelerator chips have surged over the past year as data centers upgraded their infrastructure to support new AI applications. It expects its revenue from AI chips to roughly triple to $12 billion, or nearly a quarter of its full-year revenue, in fiscal 2024 (which ends this October). That growth, along with VMware's integration and acceleration, should offset its slower sales of non-AI chips.
From fiscal 2024 to fiscal 2027, analysts expect Broadcom's revenue to grow at a CAGR of 24% as its EPS increases at a CAGR of 18%. Its stock might not seem cheap at 43 times next year's earnings, but that valuation is being inflated by one-time charges related to its recent acquisitions. On an adjusted basis, it looks more reasonably valued at 27 times forward earnings -- and it could keep heading higher as its AI business expands.
3. Arm Holdings
Arm is a U.K. chip designer that was acquired by SoftBank in 2016 and spun off in an IPO last September. Nvidia, which almost acquired Arm before antitrust regulators scuttled the deal, is still one of its top investors. Arm designs power-efficient chips and licenses its designs to other chipmakers like Qualcomm, MediaTek, and Apple. It doesn't manufacture any chips on its own, but its chip designs are used in about 99% of all premium smartphones today.
Arm still relies heavily on the cyclical smartphone market, but it's been designing more chips for the auto, PC, and cloud markets. It's also been rolling out its new Armv9 designs, which are optimized for processing AI tasks across all of its markets. Those new AI chip designs generate much higher royalties than Arm's non-AI chip designs.
From fiscal 2024 to fiscal 2027 (which ends in March 2027), analysts expect Arm's revenue to rise at a CAGR of 23% as its EPS increases at a CAGR of 88%. Arm's stock looks expensive at over 100 times next year's earnings, but it could have plenty of room to run as the AI market expands and it gradually displaces the x86 chip architecture used by Intel and AMD.
Should you invest $1,000 in Oracle right now?
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia, Oracle, and Qualcomm. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
