Artificial intelligence (AI) is changing how people work and find information online. Investors who buy the right stocks can earn handsome returns, and one market to study for future winners is AI servers.
Statista projects this market to grow tenfold to $430 billion by 2033. Here are two leading suppliers that can help you profit from this opportunity.
1. Dell Technologies
Dell Technologies(NYSE: DELL) is one of the leading players in the AI server market. The stock has good upside potential in 2025 and beyond based on strong tailwinds in the company's infrastructure solutions business.
Revenue from its infrastructure solutions grew 38% year over year last quarter, driven by accelerating demand for AI servers. Dell is still involved in PCs, which provide half of its revenue, but the company's infrastructure business will likely remain its fastest-growing business in the coming years.
Dell's competitive advantage is rooted in its services and support for its customers. The company provides cutting-edge air- and liquid-cooled servers, which is important for controlling the energy costs of operating high-powered computing systems, in addition to networking and storage solutions.
Management sees a large addressable market for AI hardware and services of $174 billion, which is growing over 20% per year. It's an attractive opportunity for Dell's infrastructure segment which is generating an annual revenue run-rate of over $40 billion.
While demand for AI servers will continue to grow at high rates, Dell is also experiencing stronger demand for traditional servers, which delivered the third consecutive period of growth in the second quarter. The company could also see accelerating revenue growth in its client solutions segment as consumers upgrade to new AI-optimized PCs launching in 2025.
Over the long term, management expects total revenue to grow at a compound annual rate of 3% to 4%, but Wall Street expects earnings to grow at a compound rate of 12%, as increasing demand for Dell's AI solutions and services should benefit margins.
The stock is a bargain, trading at a forward price-to-earnings ratio (P/E) of just 12.8 on next year's consensus earnings estimates.
2. Nvidia
All AI servers need graphics processing units (GPUs) to do their job, and that spells huge potential for the leading GPU supplier, Nvidia(NASDAQ: NVDA).
It has been one of the best stocks to benefit from AI infrastructure. The shares have soared over the last decade as demand for Nvidia's GPUs skyrocketed to support the build-out of massive data centers that can house thousands of individual servers and GPUs. The rapid adoption of AI has accelerated its revenue growth to triple-digit rates over the last year.
The chipmaker has dominated the GPU market for many years and was estimated to control 88% of the add-in board market (to upgrade PCs) in the second quarter, according to Jon Peddie Research. It has a similarly dominant lead in AI chips, which are essentially GPUs.
The company has very good relationships with its customers, including AI start-ups and leading cloud service providers, which should protect its lead in the market for those chips. Revenue grew 122% year over year in the July-ending fiscal second quarter, and analysts forecast revenue to be up 105% for the full year and another 42% next year. Nvidia expects to generate billions in revenue next quarter from its new Blackwell AI computing platform, which should be a major growth catalyst for the next few years.
The company currently doesn't have any significant competition in general-purpose GPUs other than Advanced Micro Devices, which has a smaller share of the market. As CEO Jensen Huang explained at the recent Goldman Sachs Communacopia and Technology Conference, Nvidia's new data center GPUs are very complex with 35,000 parts. They weigh 80 pounds each and 3,000 pounds for a full rack-mount installation. These massive GPUs cost many thousands of dollars, and Nvidia isn't shy about asking for a generous markup on the price. That's why Huang's company earned $53 billion in profit on $96 billion in revenue over the last year.
Considering the opportunities for AI servers, Nvidia should continue to reward shareholders with excellent returns. The stock recently surged to new highs, but still trades at a fair forward P/E ratio of 35 on next year's earnings estimates.
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John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Goldman Sachs Group, and Nvidia. The Motley Fool has a disclosure policy.
