The artificial intelligence (AI) craze gave share prices of many companies a nice boost this year, which is not surprising since this technology has started moving the needle for many businesses already.
Nvidia (NVDA 6.18%) is a prime example of how AI can change a company's fortunes in a short period. The graphics processing unit (GPU) specialist was struggling earlier this year as demand for personal computers (PCs) was weak and its gaming business was on shaky ground.
There has been a sharp turnaround in Nvidia's fortunes over the past couple of quarters as a result of its AI-related efforts. Revenue in the recently reported fiscal 2024 third quarter was up an impressive 206% year over year to a record $18 billion. That topped the 171% year-over-year revenue jump delivered in the second quarter. More importantly, Nvidia anticipates even faster year-over-year revenue growth of 233% in the current quarter to $20 billion.
Would-be Nvidia investors who missed buying the stock before its AI-fueled rally began will have to pay an expensive sales multiple of 26, thanks to the 219% jump in its share price this year. Not everyone will be comfortable paying such a steep valuation, even though Nvidia has real potential to justify it.
That's why investors looking to buy AI stocks that aren't as expensive as Nvidia but can still benefit from the adoption of this technology might want to take a closer look at the following two names.
1. Microsoft
Microsoft (MSFT 1.82%) was involved in kicking off the AI hype a year ago through its multi-billion-dollar investment in OpenAI, the start-up that developed the highly popular chatbot ChatGPT.
The company capitalized on its investment in OpenAI by integrating the latter's AI expertise into its offerings, including workplace collaboration tools and cloud computing. On the company's October earnings conference call, CEO Satya Nadella said that the company is "rapidly infusing AI across every layer of the tech stack and for every role of business process to drive productivity gains for our customers."
The good part is that Microsoft's AI-focused efforts are already bearing fruit. The company's Azure OpenAI cloud computing service now has more than 18,000 users, the reason this business unit delivered better-than-expected growth in the first quarter of fiscal 2024 (ended on Sept. 30).
Microsoft's Intelligence Cloud unit, which includes its AI-focused offerings, clocked $24.3 billion in revenue last quarter, compared to analysts' expectations of $23.5 billion. The Azure cloud in particular delivered a 29% year-over-year revenue jump, outpacing expectations of 26%.
And this is just the beginning of AI-fueled growth in Microsoft's cloud computing business. Mordor Intelligence forecasts that the cloud-powered AI market could generate annual revenue of $207 billion in 2028 versus $51 billion last year.
Microsoft's share of the global cloud computing market increased to 23% in the third quarter of 2023, up 2 percentage points from the prior year. The faster-than-expected growth that this segment delivered last quarter suggests that AI is helping the company corner a bigger share of this lucrative opportunity.
If Microsoft takes out a bigger chunk of the cloud computing market in the long run thanks to AI, growth could accelerate. Analysts have already raised their revenue expectations from Microsoft, and the following chart indicates that the growth rate is set to improve.
MSFT revenue estimates, data by YCharts.
Investors can currently buy Microsoft stock at 13 times sales, which is substantially lower than Nvidia's sales multiple. Nvidia is growing at a much faster pace than Microsoft, but the latter's AI-focused efforts are likely to drive stronger growth in the future thanks to the adoption of AI in cloud computing.
That's why investors looking to buy an AI stock that's not very expensive might want to take a closer look at Microsoft before it jumps higher following 56% gains in 2023.
2. Micron Technology
Memory specialist Micron Technology (MU 2.92%) is another potential AI winner that investors can buy at an attractive valuation right now. The stock currently trades at just over five times sales, and investors may want to buy it before it gets more expensive on the back of the solid growth it is anticipated to deliver.
The oversupply in the memory market was a big headwind for Micron in recent quarters. The chipmaker's revenue, margins, and earnings have crashed significantly as memory prices have fallen from weak demand and excess supply. However, AI is set to change the memory market's dynamics as this technology is creating the need for more high-bandwidth memory (HBM).
HBM plays a crucial role in AI chips because this type of memory offers significantly more bandwidth than other memory types, consumes less power, and has a smaller form factor, which makes it ideal to be integrated with AI chip platforms.
Nvidia is using the latest generation of HBM in its flagship H100 chip, and Micron is going to supply the same to the graphics specialist.
Micron management says that HBM is going to drive "meaningful revenues in fiscal 2024," which has just begun. This seems to be one of the reasons analysts raised their revenue estimates for the current and the next two fiscal years.
MU revenue estimates; data by YCharts.
For comparison, Micron's revenue was down 49% in the previous fiscal year thanks to the poor conditions in the memory market. More importantly, HBM could turn out to be a long-term catalyst for Micron stock. Gartner estimates that HBM demand could grow eightfold over the next five years, driven by the need for high-performance memory in general AI and generative AI models.
All this indicates that Micron might be able to deliver the impressive growth that analysts are anticipating from it, so investors would do well to act quickly and buy this semiconductor stock before it soars further following a 52% surge this year.
