No doubt about it, artificial intelligence (AI) is 2023's hottest tech trend. Beyond that, it's also helped power big gains for the stock market. Some analysts and industry watchers have already hailed the beginning of a new bull market. But regardless of what definition of bull market you use, the market's next big bullish phase will almost certainly see big gains for top AI companies.
For long-term investors, putting money behind top AI players could have tremendous payoffs. Read on to see why two Motley Fool contributors think that investing in Advanced Micro Devices (AMD 3.04%) and Microsoft (MSFT 2.22%) would be a smart move right now.
AI requires more computing power
Parkev Tatevosian: The rise in the effectiveness of AI is driving more people, enterprises, and institutions to use services like large language models. A prime example is Open AI's ChatGPT. Interestingly, these services require computing power to process requests from users. That's where companies like Nvidia (NVDA 3.46%) and Advanced Micro Devices can benefit.
Given that Nvidia's stock price soared in response to the increase in demand, AMD might be an excellent way to ride this AI wave. Already, AMD has boosted revenue from $5.3 billion in 2013 to $23.6 billion in 2022. If it can effectively shift the production of its CPUs and GPUs to meet the rising demand from AI, its revenue could rise further still.
Additionally, AMD has proven it can run its business with excellent profits at scale. In the above-mentioned years, AMD's operating income increased from $85 million to $1.26 billion. It would not surprise me if AMD's profit stayed elevated over the next decade.
AMD P/E Ratio (Forward 1y) data by YCharts.
AMD's competitor Nvidia has gotten the bulk of the credit for benefiting from the jump in demand, perhaps deservedly. Fortunately for investors interested in AMD, that left AMD's stock trading at a more reasonable forward price-to-earnings ratio of 26.8. Long-term investors looking to benefit from the rising AI industry could do well with AMD stock.
Microsoft has a clear leadership position in AI
Keith Noonan: Microsoft stock has already gotten a big boost from AI this year -- and it's not hard to see why investors are excited about the stock. The company's $10 billion investment in ChatGPT and Dall-E creator OpenAI has given it a substantial stake in one of the hottest names in AI, and the software giant's internal artificial intelligence initiatives stand to have payoffs across a variety of business segments.
With a market capitalization of roughly $2.5 trillion, Microsoft already stands as the world's second-largest company. While the tech leader's already massive size suggests that there are other players in the AI space that will likely be able to deliver more explosive stock returns, few businesses can claim to have a stronger position in AI. Crucially, the stage could be set for Microsoft's early leadership in artificial intelligence to become even more pronounced from here on out.
Between its cloud services, operating system, productivity software, and other business units, Microsoft has a range of product and service offerings that are on track to see significant benefits from the implementation of AI. These services will also generate huge amounts of data that the company will be able to use to feed into and improve AI models.
Even though Microsoft is already one of the world's biggest companies and has seen impressive stock performance across this year's trading, the software giant's substantial competitive advantages make it a worthwhile buy-and-hold play for investors looking to benefit from the AI revolution.
AMD and Microsoft are likely to be big winners from the AI trend
Artificial intelligence is on track to have a transformative impact on virtually every industry under the sun. While some smaller winners in the space will undoubtedly emerge, the AI revolution will likely favor large, established hardware and software players with top-tier computing capabilities and software and data resources.
Within those molds, AMD and Microsoft present attractive risk-reward profiles right now and stand a good chance of delivering market-beating returns for long-term investors.
