It's becoming clear that artificial intelligence (AI) isn't just a stock market sensation but a remarkable innovation that will impact the world in countless ways. According to a PricewaterhouseCoopers (PWC) study, AI could contribute over $15 trillion in economic value to the global economy by 2030.
Identifying and holding the companies driving AI's growth could prove very lucrative for long-term investors. That's why I set out to find them. While anything can happen in the future, today's thoroughbreds look like Nvidia (NVDA 6.18%), Alphabet (GOOGL 10.22%) (GOOGL 10.22%), and Super Micro Computer (SMCI 8.89%) as three top companies to bet on.
Even better, if you have some spare cash that you don't need for near-term expenses, you can own any of the three stocks for under $1,000, giving you access to solid long-term opportunities.
I'll explain the investment thesis for each stock below.
1. The dominant force in AI chips
Nvidia was one of the best-performing stocks in 2023, but it deserves the praise it's gotten. The company's AI chips have become the runaway industry leader, grabbing a dominant market share as high as 90%. According to Deloitte, the AI chip market could grow to between $110 billion and $400 billion by 2027. That signals tremendous growth for the dominant player, which has done "just" $45 billion in companywide sales over the past year.
Even if competitors like AMD chip away at Nvidia's share, Nvidia's top line will likely grow for years, barring an unexpected and epic collapse. That growth scenario helps explain why the stock can keep performing despite soaring 350% over the past three years.
Analysts estimate long-term earnings will compound 42% annually on the back of artificial intelligence growth, which makes the Nvidia's current forward P/E of 51 an arguably reasonable price, especially for investors intending to buy and hold the stock to realize AI's potential.
2. Alphabet sits on a data gold mine
If computing is one half of the AI coin, data, which AI models train on, would be the other. Arguably, no company is better at capturing data than Alphabet, which owns and operates the world's two most visited websites, Google Search and YouTube. They combined for 280 billion visits in November alone, compared to 18 billion for third place.
Alphabet is capturing every visit to its websites. Every search, click, and video view. It uses its data to sell advertisements, which is how Alphabet makes most of its revenue and profit. It also puts Alphabet in the driver's seat to use its data with AI to advertise better or develop and sell its AI products, including ChatGPT competitor Bard.
Investors can own Alphabet in confidence for its ad business alone, which continues to flex impressive growth despite its size. Ad revenue grew 11% year-over-year in Q4, hitting a staggering $65.5 billion. It's a golden goose creating tens of billions of dollars of free cash flow annually for Alphabet. Management's usage of that cash to repurchase shares and grow earnings per share gives the stock a high long-term floor. Plus, the potential for AI innovation from within Alphabet gives investors upside potential, too.
3. A key partner for businesses investing in AI
Perhaps not as well-known as the companies above it, don't underestimate Super Micro Computer. The company builds modular server systems for corporations. Building a computer system for AI or other high-tech applications isn't like picking it out at the store and following the instructions. Most companies don't want to (or know how to) build their systems. Super Micro Computer's proprietary hardware and know-how provide its customers with a solution.
Super Micro Computer benefits from a good reputation in the tech industry; it's been in business since the early 1990s when corporate computing began building steam. Additionally, AI has recently accelerated Super Micro Computer's growth to new heights. Its Q2 revenue for fiscal year 2024 grew 103% year-over-year to $3.66 billion. Its 73% growth over Q1 revenue signals that AI's impact on its business could still be in the early innings. Companies are turning to Super Micro Computer to quickly and efficiently get AI systems up and running.
The company's clear AI momentum sent the stock soaring after its Q2 earnings, but the stock still could have room to run over the long term. The market is pricing the stock at 27 times forward earnings, and analysts project a 25% long-term earnings growth (estimates may be revised upwards after such a strong Q2). That's a PEG ratio of just over 1, signaling the stock is cheap for its expected growth. Of course, nothing is guaranteed. Still, it seems that Super Micro Computer's reputation is winning AI-related business, which bodes well for future investment returns if AI continues delivering up to its potential.
