Over the past few years, many growth-oriented investors stuck with the FAANG stocks -- Facebook's parent Meta Platforms, Amazon, Apple, Netflix, and Google's parent Alphabet -- as their core tech investments. After all, those five tech titans dominated the social networking, e-commerce, cloud, streaming video, advertising, and premium mobile device markets.
But over the past year, the booming market for artificial intelligence (AI) services -- driven by generative AI platforms like OpenAI's ChatGPT -- propelled many AI-related tech stocks past their FAANG counterparts. Let's examine three of the top plays in that nascent market, and why they're poised to skyrocket over the next few years.
Image source: Getty Images.
The hardware play: Nvidia
Nvidia (NVDA +4.30%) is the world's leading producer of discrete GPUs for high-end gaming. However, it also produces even more powerful GPUs for data centers, where they're used to process complex machine learning and AI tasks.
NASDAQ: NVDA
Key Data Points
CPUs can't process those tasks efficiently because they process each data point individually through scalar processing. GPUs use vector processing, which processes a broad range of integers and floating point numbers simultaneously.
That's why all of the leading generative AI platforms -- including ChatGPT -- are currently powered by Nvidia's GPUs. The generative AI market could still expand at a compound annual growth rate (CAGR) of 34% from 2023 to 2032, according to Allied Market Research, which gives Nvidia plenty of room to grow its data center business.
Analysts expect Nvidia's revenue to grow at a CAGR of 39% from fiscal 2023 (which ended this January) to fiscal 2026. Its earnings per share (EPS) are also expected to grow at a CAGR of 88%. We should take those estimates with a grain of salt, but Nvidia's growing data center business and market-leading gaming GPU business could light a blazing fire under its stock. If you believe that will happen, then Nvidia's stock might still seem reasonably valued at 55 times forward earnings.
The software play: Microsoft
It's tough for retail investors to invest in ChatGPT because OpenAI is still a private start-up. But it's easy to buy shares of its top backer Microsoft (MSFT +2.11%), which already invested over $13 billion into the seven-year-old company.
NASDAQ: MSFT
Key Data Points
Microsoft already integrated ChatGPT into its own Bing search engine, Azure cloud infrastructure platform, and Outlook email platform, and it uses OpenAI's DALL-E to generate AI images for Bing's Image Creator. Those moves suggest Microsoft will eventually streamline and automate most of its services across its ecosystem with AI tools. It could also replace a large portion of its own human employees with AI services.
That evolution, which could be just as important as its cloud-based transformation over the past decade, could significantly boost Microsoft's sales, operating margins, and profits. It would also ensure it keeps pace with the next big technological shift as more of its enterprise customers request AI-driven cloud-based services.
From fiscal 2023 (which ended this June) to fiscal 2026, analysts expect Microsoft's revenue to grow at a CAGR of 13% as its EPS rises at a CAGR of 15%. Those are solid growth rates for a stock that trades at 28 times forward earnings.
The creative play: Adobe
Like Microsoft, Adobe (ADBE +2.70%) underwent a dramatic cloud-based shift over the past decade as it turned its desktop apps into cloud-based services. And just like Microsoft, Adobe doesn't plan to miss the next big shift toward AI services.
NASDAQ: ADBE
Key Data Points
Seven years ago, Adobe launched an AI and machine learning framework called Adobe Sensei. Sensei mainly worked behind the scenes to accelerate and automate some tasks across its Creative, Marketing, and Document cloud platforms.
But earlier this year, it rolled out a new generative AI tool called Firefly that showcases Sensei's powerful capabilities. With Firefly, its Creative Cloud users can create images, videos, and digital models from scratch with simple text-based prompts. It can also accelerate its Document Cloud, Experience Cloud, and Adobe Express workflows.
Adobe's Creative Cloud already dominates the digital media market with its industry-standard Photoshop, Illustrator, and Premiere Pro apps. AI upgrades for those tools could lock in its users while opening the floodgates for a new generation of AI artists and creators. Companies could also use those AI-powered tools to reduce their dependence on human creators.
Analysts expect Adobe's revenue to grow at a CAGR of 11% from fiscal 2022 (which ended last December) to fiscal 2025, while its EPS rises at a CAGR of 16%. Based on those estimates, its stock still isn't too pricey at 29 times forward earnings.
