This article was updated on Dec. 8, 2017, and originally published on July 18, 2017.
There are plenty of companies you could choose from if you wanted to benefit from the growing artificial intelligence (AI) market. I won't get into all of them, but it's safe to say that nearly all the big players in the tech sector -- like Apple, Microsoft, IBM, Intel, Facebook, and a slew of others -- believe AI could reach a market size of $59.8 billion by 2025.
But that's not helpful if you want to know which companies are making the biggest moves in the space, and which have the most potential to benefit. To help answer that, we need to take a closer look at NVIDIA Corporation (NASDAQ:NVDA) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). These companies may differ in their approach to AI, but both deserve to be at the top of the list for AI investments. Here's why.
Why NVIDIA is a top AI stock
NVIDIA is basically a tech investor's dream at the moment, mainly because its share price has gained around 100% over the past 12 months. NVIDIA makes graphics processors that are used in computers for things like high-performance gaming, but the company has been taking its graphics processing unit (GPU) know-how and wisely applying it to AI businesses as well.
For example, the company has built a self-driving vehicle supercomputer -- the latest version is called DRIVE PX Pegasus -- which processes a massive amount of image information so that semi-autonomous cars can perceive the world around them. The latest Pegasus iteration will allow automakers to bring Level 5 autonomy (full self-driving) to their vehicles. Audi, Toyota, Tesla, and others are already using earlier versions of the company's AI tech for their semi-autonomous vehicles and NVIDIA believes its total addressable market for AI-powered self-driving cars will be about $8 billion in 2025.
In fact, NVIDIA believes that its total addressable market for all AI will be around $40 billion between 2020 and 2025. That includes everything from self-driving cars to AI cities and GPU-powered deep-learning data centers.
The company's data-center segment is a growing AI opportunity because more and more companies are looking to GPUs to power intense image processing on their servers. Goldman Sachs analyst Toshiya Hari thinks the company already holds nearly 90% of the market for chips used for computer-training tasks, a part of the machine-learning and AI markets.
One thing investors should know is that NVIDIA's "top AI stock" designation comes from the company's potential in the space, and not necessarily from its current revenues. In fiscal third quarter 2018, the company brought in just 5.5% of its total revenues from the automotive market (which includes its Pegasus Drive PX system) and about 19% from its data center business. Meanwhile, GPU sales for gaming accounted for about 59% of revenue.
But the potential here for NVIDIA is too large to ignore. Graphics processing is an integral part of many AI learning systems, and NVIDIA's chips are some of the best in the business. With automakers already betting on the company's AI computer and tech companies looking to NVIDIA for their AI data centers, it's only a matter of time before the company's AI revenues follow its opportunities.
Why Alphabet is a top AI stock
Like NVIDIA, Alphabet is pursuing AI in several different ways, but one of the most important is using it to serve up better ads to its users.
Alphabet's Google debuted its Smart Bidding learning system in 2016, which uses machine learning to better automate bids on AdWords and DoubleClick. Google said at the time that the system accounts for many more factors than a person or team could determine, in order to make ads more efficient. The importance of serving up the most relevant ads becomes clear when you consider that Google is expected to earn about 78% of all U.S. search ad revenue in 2017, and more than 80% by 2019, according to data from eMarketer.
But Google has been very persistent in expanding its AI footprint in other areas as well. According to Recode, the company has acquired at least 20 AI companies over the past few years. One of those is DeepMind, which Google plans to use to do things like cure diseases, and find new ways for companies to reduce energy consumption.
And, of course, the company is using its AI to build some of the most advanced driverless cars. Google spun out its self-driving car business into its own company, called Waymo, in 2016, but it still falls under the broader umbrella of Alphabet companies. The opportunity for Alphabet here is in using AI-powered self-driving technology to earn revenues from self-driving car services, and in selling the technology to other companies to implement in their own vehicles. Waymo is already testing its technology with public riders in Phoenix, as part of a partnership with Fiat Chrysler.
Additionally, Google is using its AI to improve its voice assistant, called Google Assistant. Google Assistant now comes on newer versions of Android phones and in the company's smart-home speaker, Google Home. Smart-home speakers are expected to become a $13 billion market by 2024.
But Alphabet's biggest opportunity for AI remains in how it's used to sell more ads. Google's ad revenue accounted for 86% of Alphabet's total revenue in the third quarter 2017, so it's very likely that the company will continue to apply its AI efforts to keep that trend going.
Take a buy-and-hold approach with AI
Remember that the artificial intelligence market is just getting started, which means that there's tons of time to reap the benefits, but it could also be a while before the market takes off. Investors looking to Alphabet and NVIDIA for AI gains will likely get them -- but should plan for the benefits to come over the next several years, as opposed to the next few quarters.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, Nvidia, and Tesla. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.