There's simply no way to ignore what's happening in artificial intelligence (AI). The recent advancements in generative AI and large language models (LLMs) -- which gave birth to next-generation chatbots -- have set off a firestorm of interest from consumers and investors alike. This has since taken on a life of its own, and the hype cycle is currently shifted into overdrive.
Yet even amid the hype, the opportunity appears vast. Even the most conservative estimates are stunning. TD Cowen analyst John Blackledge has crunched the numbers and concluded that spending on generative AI software will top $81 billion by 2027, representing a compound annual growth rate (CAGR) of 190%.
For those looking to benefit from the AI gold rush without betting the farm, here are three companies with proven track records that provide investors with plenty of upside.
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No-brainer stock No. 1: Alphabet
It shouldn't be surprising to find an industry stalwart and AI pioneer like Alphabet (GOOGL -3.94%) (GOOG -3.92%) topping the list.
The company doesn't need to rely on some pie-in-the-sky future to benefit from AI. Google has a long history of using these advanced algorithms to provide relevant responses to user search queries. Its success is undeniable, helping Google retain an unrivaled hold on the search market for more than 20 years. The company absolutely dominates the competition, commanding roughly 93% of the worldwide search market.
Its dominance in search fuels Alphabet's industry-leading digital advertising business, which accounts for about 30% of global digital ad spending, according to marketing trade publication Digiday. Google's AI helps ensure the right target markets sees its ads, which account for the bulk of the company's revenue.
There's more. Google Cloud provides users with a long and growing list of AI functionality. This has helped turn it into the third-largest cloud infrastructure provider, while also making it the fastest-growing of the big three. Google Cloud revenue climbed 30% year over year in the first quarter, outpacing Amazon Web Services and Microsoft (MSFT -4.54%) Azure, which grew 27% and 16%, respectively.
Alphabet recently announced plans for additional investment in generative AI while integrating the technology into a broad cross section of its products and services.
The downturn has weighed on Alphabet's share price, allowing investors to get all the AI potential for a song. The stock is currently selling for less than 5 times next year's sales, near its cheapest valuation since 2013. This is a compelling price to pay for several industry-leading businesses and exposure to the upside of AI.
No-brainer stock No. 2: Microsoft
The catalyst sparking the current renaissance in AI can undoubtedly be traced to the debut of ChatGPT late last year. The app set a record by acquiring 100 million monthly active users just two months after its launch, setting a new bar for the fastest-growing consumer app in history, according to Reuters.
That spark turned into a roaring wildfire amid reports that Microsoft had invested a total of $13 billion in ChatGPT creator OpenAI. The software giant also announced ambitious plans to integrate ChatGPT's conversational AI into its Bing search engine. Many of the biggest names in technology raced to come up with their own generative AI solutions, and the AI arms race was on.
Microsoft has been in the search engine market for a while, but the fervor surrounding generative AI whipped up interest in Bing search. It won't take much in the way of market share gains to move the needle: "For every one point of share gain in the search advertising market, it's a $2 billion revenue opportunity for our advertising business," according to Philippe Ockenden, Microsoft's CVP of finance.
The company is well established in the enterprise software, personal computing, and cloud computing arenas, so there are plenty of lucrative foundational businesses worth investing in while Microsoft pursues its next AI-fueled revenue stream. Plus, the company's sizable client base is a captive audience and potential customers for Microsoft's advances in AI.
Let's not forget that, like Alphabet, Microsoft already provides a host of AI-related products and services to users via its Azure Cloud. The company is also integrating AI across the broad spectrum of its products and services, including Windows, Microsoft 365, Xbox, HoloLens, Teams, and even LinkedIn -- to better match job seekers with available positions.
The stock isn't cheap at 11 times next year's sales, but investors frequently reward premium valuations to companies with a long history of growth and a large opportunity, and Microsoft is the poster child for execution.
No-brainer stock No. 3: Nvidia
When it comes to AI, arguably no company is better positioned to benefit from the current trend than Nvidia (NVDA 1.40%). It helped pioneer the training of AI models by adapting the high-end graphics processing units (GPUs) used to render lifelike images in games. Nvidia GPUs are the gold standard for AI due to the cutting-edge hardware and software stacks that provide turnkey AI operations across a variety of industries and sectors. In fact, ChatGPT was trained on roughly 10,000 Nvidia GPUs -- and the next generation will likely require more.
As valuable as AI is to Nvidia's long-term prospects, the company is the undisputed leader in the discrete desktop GPU market, controlling a dominant 88% share -- leaving scraps for the competition. For full disclosure, the gaming market has been hit hard by the downturn. Gamers are using their existing graphics cards longer, but once the economy rebounds, the pent-up demand could send Nvidia stock even higher.
That long-expected turnaround may be on the horizon. CEO Jensen Huang recently said, "Gaming is recovering from the post-pandemic downturn, with gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering." A rebound in the gaming market would support the stock's stellar gains so far this year.
There's also the cloud computing and data center markets -- and Nvidia processors are the semiconductor of choice for zipping information across the ether. Nvidia is adding other tools to its data center market, with a new central processing unit (CPU) designed to steal share from Intel and Advanced Micro Devices.
Bears will point to Nvidia's valuation -- and at 20 times next year's sales, they'd certainly have a point. That said, if the company can latch on to the soaring AI growth engine and hold on, it will eventually catch up to its lofty price.
Valuation aside, of all the stocks set to benefit from AI, Nvidia could be the clearest winner.
