Artificial intelligence (AI) stocks have taken the stock market by storm as investors, CEOs, and pundits all seem convinced that AI, in particular generative AI, will be the next major transformative technology.
Nvidia has been the biggest winner this year, as the chip maker sells the building blocks to run complex large language models, and its chips have been in high demand from cloud infrastructure operators like Amazon, Microsoft, and others, leading to soaring revenue and profits.
Nvidia shares have more than tripled this year, but some AI stocks could be just getting ready to take off. Let's take a look at two of them.
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1. The Trade Desk
The Trade Desk (TTD 1.67%) is the leading independent demand-side digital advertising platform. In other words, The Trade Desk is an adtech company that helps ad agencies and brands run, manage, and optimize their ad campaigns across multiple channels.
The Trade Desk has been a big winner over its history with the stock up more than 2,000% since its 2016 IPO, and its next leg up could be driven by AI. In June, the company unveiled its new AI-based platform called Kokai, which distributes deep learning algorithms across the digital media buying process. Kokai analyses 13 million ad impressions every second, helping clients buy the right ad slots at the right time and digital platform to reach the biggest audience for the right value.
CEO Jeff Green explained on the recent earnings call that many of Kokai's biggest innovations won't be available to all of its customers until next year, meaning the business should experience tailwinds from those investments in AI.
The Trade Desk stock actually fell sharply after its third-quarter earnings report because its fourth-quarter guidance was weaker than expected. However, investors who take advantage of that sell-off and buy the dip could be handsomely rewarded next year as the digital ad market should continue to recover. Additionally, Kokai has the potential to accelerate the company's growth rate and increase its addressable market opportunity, which it values at roughly $1 trillion. With AI potentially giving it a competitive advantage, the company could make significant market share gains in the coming years.
2. Oracle
Oracle (ORCL 2.02%) may be regarded as a legacy tech company by some, best known for its database software and database management system. But it is also well positioned to benefit from the generative AI boom.
Oracle's cloud infrastructure revenue jumped 66% year over year in its most recent quarter to $1.5 billion, showing strong demand for its cloud infrastructure service, which is built on Nvidia superclusters. In fact, Larry Ellison, the co-founder, chairman, and chief technology officer of Oracle, said that the company's remote direct memory access (RDMA) interconnected Nvidia superclusters "train AI models at twice the speed and less than half the cost of other clouds."
Oracle's strength in database systems would also seem to give it an advantage in generative AI as the training of large language models requires massive amounts of data and the systems to make it work.
The company also appears to have more demand for AI-related capabilities than it can handle. CEO Safra Catz said on the earnings call, "Because we have far more demand than we can supply, our biggest challenge is building data centers as quickly as possible." Ellison also noted that AI development companies had signed contracts to purchase more than $4 billion in training capacity from the company's Gen 2 Cloud as of the most recent quarter, which was twice as much as its backlog three months earlier.
Oracle's cloud infrastructure business still makes up a relatively small percentage of its total revenue, bringing in about 12% of the total. But its cloud-based software businesses are delivering solid growth, and the stock's price-to-earnings ratio of 22 seems to assume that its growth rate will only be modest.
However, if the company can capitalize on the demand for AI infrastructure and training capacity, Oracle could see better-than-expected growth for the next several years, and that is likely to make the stock a winner. Keep your eye on the company's next quarterly report due out in mid-December. If Oracle reports another round of strong AI demand, the stock is likely to soar.
