Many investors might think of sentient robots when tech pundits discuss the booming artificial intelligence (AI) market. However, intelligent robots only represent a tiny silver of a worldwide AI market that is projected to grow at a compound annual growth rate (CAGR) of 35.6% from 2021 to 2026, according to Facts and Factors.
A large portion of that market actually revolves around algorithms and software platforms that help companies make data-driven decisions, automate repetitive tasks, streamline their operations, and cut costs.
Let's examine three top AI stocks that will benefit from the market's expansion.
Nvidia (NVDA -0.98%) is the world's top producer of discrete GPUs. It controlled 83% of the market in the second quarter of 2021, according to JPR, while its rival Advanced Micro Devices controlled the remaining 17%.
Nvidia's discrete GPUs are usually associated with high-end PC gaming, but it also sells high-end GPUs for data centers that process AI and machine learning tasks more efficiently than stand-alone CPUs.
Nvidia's main data center products include its A100 Tensor Core GPU and the DGX A100 AI system, which bundles together eight A100 GPUs. All three of the public cloud leaders -- Amazon, Microsoft, and Alphabet's Google -- currently use Nvidia's A100 GPUs to power some of their AI services.
Nvidia also acquired the data center networking equipment maker Mellanox last April to further strengthen that core business. Nvidia's data center revenue surged 124% to $6.7 billion, or 40% of its top line, in fiscal 2021 (which ended in January). Its total revenue rose 53% to $16.7 billion.
Analysts expect Nvidia's revenue and earnings to rise 54% and 65%, respectively, this year, as it sells more gaming and data center GPUs. It faces some near-term headwinds with the ongoing chip shortage and its delayed takeover of Arm Holdings, but its stock still looks reasonably valued at 47 times forward earnings.
Palantir (PLTR -0.14%) is a data mining and analytics company that operates two main platforms: Gotham for government agencies and Foundry for large enterprise customers.
Palantir's platforms collect data from disparate sources, process it with AI algorithms, and help organizations make informed decisions. The U.S. military uses Gotham to plan missions, while the CIA -- one of Palantir's earliest investors -- uses it to gather intel. Palantir leverages that hardened reputation to attract big enterprise customers like BP and Rio Tinto to its Foundry platform.
Palantir's revenue rose 47% to $1.1 billion in 2020, and it expects its revenue to grow at least 30% annually from 2021 to 2025. That ambitious forecast suggests it will generate more than $4 billion in revenue in 2025. Palantir isn't profitable yet, but its adjusted gross and operating margins are expanding and suggest its platforms still have impressive pricing power.
Palantir's stock isn't cheap at 37 times this year's sales, but its ambitious growth targets and its ultimate goal of becoming the "default operating system for data across the U.S. government" make it a top AI stock to buy.
Salesforce (CRM 0.75%) is the world's largest cloud-based customer relationship management (CRM) service provider. It also provides cloud-based e-commerce, marketing, and analytics services.
Salesforce's services help companies manage their sales teams and customer relationships more efficiently, automate tasks, and reduce their overall dependence on on-site human employees. It unites all those platforms with its data visualization platform Tableau, its newly acquired enterprise communication platform Slack, and its AI-powered Einstein assistant.
Salesforce's revenue rose 24% to $21.25 billion in fiscal 2021 (which ended this January), and it expects to more than double its annual revenue to over $50 billion by fiscal 2026. It expects that growth to be buoyed by the secular expansion of all of its five main end markets -- which include sales, service, marketing & commerce, platform, and analytics & integration.
That's an impressive forecast for a stock that trades at 59 times forward earnings and less than 10 times this year's sales. A few concerns about Salesforce's $27.7 billion takeover of Slack have been depressing the stock's valuations lately, but it's still well-poised to profit from a growing need for cloud-based CRM services and other AI-powered data-crunching tools.