Like many new technologies, generative artificial intelligence (AI) has become a bit of a hype cycle, and investor excitement is beginning to overshadow fundamentals. But like every hype cycle in the past, this one will mature. And the AI companies with the strongest business models will stand the test of time.
Let's explore some reasons why Nvidia (NVDA +0.87%) and Amazon (AMZN 0.38%) look to be among the best in an increasingly competitive field, and could make excellent buys in 2024.
1. Nvidia
If you liken the artificial intelligence boom to the California Gold Rush, Nvidia would sell the picks and shovels instead of mining for gold. This strategy gives the company a massive market opportunity and shields it from rising competition in the more consumer/client-focused side of the industry. And despite its market cap of $1.21 trillion, investors aren't too late to bet on the chip makers' long-term potential.
NASDAQ: NVDA
Key Data Points
Nvidia's third-quarter revenue more than doubled to $18.12 billion because of surging demand for its data center chips, which are used to train and run the most advanced generative AI applications.
This level of growth is staggering for such a large company. More importantly, it is translating to record-breaking profitability. Net income surged more than 1,200% to $9.24 billion. This can be credited to Nvidia's spectacular pricing power because of low competition, which has led to high margins.
Rivals such as Advanced Micro Devices are racing to bring competition to the AI chip market. But with industry experts expecting the opportunity to be worth $400 billion by 2027, there is plenty of room for more players.
While Nvidia's trailing price-to-earnings (P/E) multiple of 65 looks high compared to the S&P 500 average of 26, this is a backward-looking metric that doesn't account for the company's epic growth rate. With a forward price-to-earnings (P/E) multiple of 25, Nvidia stock is still affordable relative to its projected earnings.
2. Amazon
Like Nvidia, Amazon is another technology giant focusing on the infrastructure side of the AI opportunity, albeit a little bit further up the food chain. The company is incorporating AI-related services into its cloud computing platform AWS, and this could add much-needed growth and diversification to its sprawling technology empire.
In September, Amazon announced the general availability of Bedrock, a platform designed to help clients build and scale customizable AI models. Bedrock will compete with similar services from rivals like Alphabet and Microsoft. But its association with the AWS ecosystem (the leading cloud service provider) could give it an economic moat. Because of its scale, more users are familiar with AWS, and enterprises may prefer to take a one-stop-shop approach to all their cloud computing needs.
Image source: Getty Images.
Amazon has also built its own AI-capable chips, Trainium and Inferentia, which could help lower costs and reduce Amazon's dependence on third-party providers for its hardware.
With a forward P/E of 40, Amazon stock isn't cheap. But part of the premium valuation can be explained by management's ongoing cost-cutting efforts, which are improving the company's bottom line. Third-quarter net income rose 244% year over year to $9.88 billion.
The power of an evolving business
Throughout their histories, Nvidia and Amazon have gone through substantial evolutions in their business models.
Nvidia made its name selling GPUs for personal computers before demand shifted toward cryptocurrency mining and data centers. Amazon started off as an online bookseller before transitioning to a generalized third-party marketplace that gets most of its profits from cloud computing.
Artificial intelligence could end up becoming the next big growth opportunity for both companies, and it isn't too late for investors to bet on their transitions.
