Artificial intelligence (AI) powers some of the most fascinating technological breakthroughs today. You might have heard about OpenAI's ChatGPT. It's basically a natural language processor that can interpret simple queries and give surprisingly comprehensive answers, and it's powered, of course, by AI. A recent estimate by the International Data Corp. (IDC) says that spending on AI technology grew 20% in 2021, reaching $383 billion, and it was expected to reach $450 billion in 2022.
Companies are investing heavily in AI for several reasons. AI can boost labor productivity, improve operating efficiency, speed up innovation, and make more useful products for customers. Companies that can achieve these benefits will be in the best position to stay ahead of competitors, and therefore deliver returns to investors. This is why every company will likely be using AI in some form in the future.
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Today we're going to look at three leading users of this technology -- Advanced Micro Devices (AMD 1.36%), Amazon (AMZN 1.49%), and Alphabet (GOOG 1.43%) (GOOGL 1.42%). We'll look at how they are using AI to drive growth in their respective businesses, and why you might want to consider buying shares for your portfolio.
1. Advanced Micro Devices
To use AI, companies need massive computing power for inferencing and training software models. AMD is one of the leading providers of graphics processing units (GPUs). Several GPUs running simultaneously are needed to process large data workloads to train AI models. It's this opportunity to sell more chips in the burgeoning AI market that will serve as a major catalyst for the stock over the next decade.
AMD has already experienced growing demand for chips in cloud service data centers in recent years. Excluding the acquisition of Xilinx last year, AMD grew revenue by 20% in 2022. However, as the year progressed, Wall Street grew concerned about weakening demand due to macroeconomic headwinds, which sent the stock down. By the fourth quarter, AMD reported a decline in data center GPUs.
While companies are tightening their budgets over economic uncertainties, AMD should see more growth in 2024. Later this year it will launch the next-generation MI300 GPU accelerator for handling large AI applications in cloud data centers. It's already been selected to be used by the El Capitan supercomputer at Lawrence Livermore National Laboratories.
AMD is also using AI to drive demand on the consumer side. The new Ryzen 7040 Series Mobile processors for notebook PCs are the first chips featuring a dedicated AI engine in an x86 processor. The AI capabilities of the 7040 are designed to deliver better battery life and power efficiency, among other benefits.
During the fourth-quarter earnings call, AMD CEO Lisa Su said, "We believe that AI is a huge driver of compute growth. And given our portfolio, it should be a driver of our growth as well." Following its acquisition of Xilinx, management estimated its long-term addressable market at $135 billion across cloud, edge computing (e.g. 5G and automotive), and intelligent devices.
The long-term trends driving demand for more computing power are good reasons to consider buying shares of AMD. With the stock trading 52% off its previous high, now would be a great time to buy before the next bull market.
2. Amazon
Amazon has delivered incredible returns for shareholders over the last few decades. Its growing revenue and cash flows have fueled a massive 393% increase in capital expenditures over the last five years, growing to over $60 billion last year. Some of these expenditures are going to support the build out of fulfillment centers for e-commerce, but the rest is funding large investments in technology and data centers.
One area where Amazon is using AI is in its Amazon Web Services cloud services business. AWS is the largest cloud services provider, with over 30% market share, and it made up 14% of Amazon's revenue in the fourth quarter. Companies using AWS can integrate Amazon's AI services into their applications to realize several benefits, including better security and personalized recommendations. These are the same recommendation systems that power Amazon's consumer services.
For example, Amazon's Alexa voice assistant used in its Echo devices is powered with AI. In fact, AI can help Echo detect and interpret acoustic sounds like shattering glass. With sophisticated capabilities like this today, Amazon may offer services in retail in another 30 years that no one is imagining today.
Amazon already has many advantages, with over 200 million loyal Prime members, a wide selection of offerings, and great customer service. Most importantly, Amazon's ability to monetize data using AI to deliver recommendations, accurate search results, and content drives Amazon's retail business.
Amazon is at the forefront of AI-driven commerce, which is why every investor should consider holding this stock for the long term.
3. Alphabet
We can't talk about top AI stocks without including Google's parent company. AI impacts just about everything Alphabet does. It powers the recommendations and results on Google Search, YouTube, and other apps like Google Translate.
Over the last five years, the company has invested more than $100 billion cumulatively in research and development. Alphabet says these investments ultimately help it to "responsibly and boldly develop more capable and useful AI every day."
GOOG Research and Development Expense (TTM) data by YCharts
Google Search handles billions of searches every day, and 15% of those are new queries the company has never seen before. In 2018, Google developed a neural network-based technique called BERT (bidirectional encoder representations from transformers) that can understand the intent behind each query, which was a major breakthrough. BERT is one example of how the company continues to leverage the power of AI to improve experiences for its customers.
We can ultimately tie Alphabet's use of AI to revenue growth. Without useful experiences for users, Google would lose relevance, and it wouldn't take long for competitors to offer better services. But since Google has deep pockets to invest in cutting-edge AI technology, it can make its services smarter, which keeps billions of users coming back to its apps. This is why Alphabet is one of the leaders in digital advertising, which made up 78% of its business in 2022.
Investors can currently buy Alphabet stock for 32% less than it cost a year ago. That brings the shares' forward price-to-earnings ratio to an attractive 17.8, which is a discount to the S&P 500 P/E of 21. That might be a bargain for this AI leader.
