Investor interest in artificial intelligence (AI) exploded over the past year, for good reason. Companies that are positioned to profit most from this groundbreaking technology are experiencing robust demand that could lead to attractive returns for shareholders.
The good news is that investors don't have to make risky bets to earn great returns. Here are two of the world's most profitable companies that can deliver spectacular gains for long-term investors.
1. Nvidia
Investor interest around Nvidia (NVDA 2.94%) increased exponentially in recent years in conjunction with its stock performance. The demand for the company's data center chips drove the share price up 3,000% in just the last five years.
NASDAQ: NVDA
Key Data Points
Nvidia has dominated the market for graphics processing units (GPUs) for many years, most notably among gamers who buy its GeForce line of GPUs to play video games. But its GPU systems designed for powerful data centers evolved into an incredible growth opportunity, as data center operators scoop up its powerful H100 enterprise chips needed for AI training.
The important thing is that Nvidia doesn't show signs of a high-flyer that will fizzle out. It is a highly profitable business. Last year, it earned $30 billion in profit on $61 billion in revenue. The demand for its costly data center chips continues to drive stellar increases on the bottom line. Nvidia reported a year-over-year increase of 628% in net profit in the most recent quarter.
It's also important to note that Nvidia offers more than just GPUs. It also sells networking components and software solutions that are needed to build and run data centers. Nvidia's networking revenue grew 242% year over year last quarter. This complete data center solution gives Nvidia an advantage over competitors that supply AI-optimized chips.
The growing revenue from GPUs and other products indicates broad demand for AI infrastructure. Nvidia will continue to benefit from the initial ramp in enterprise investment in AI infrastructure, but as AI models continue to get smarter and become more complex in the decades to come, Nvidia should see sustainable growth from constant upgrading of hardware and other data-center components.
2. Microsoft
Nvidia is the face of AI on the hardware side, but Microsoft (MSFT 0.43%) is filling that role on the software side. While not many saw the significance at the time, Microsoft's 2019 investment in ChatGPT owner OpenAI is, in hindsight, one of the most important strategic partnerships in the history of technology. The company's share price tripled over the past five years and is in a great position to deliver more returns.
NASDAQ: MSFT
Key Data Points
The OpenAI deal paved the way for Microsoft to bring AI services to cloud customers in Microsoft Azure while also spearheading the rollout of the Copilot generative AI assistant on Windows. From subscription services in Microsoft 365 to enterprise offerings in Azure, Microsoft has several ways to make money off AI.
Copilot is already available on nearly 225 million Windows PCs, where Microsoft can pad its revenue with monthly subscriptions to use the AI assistant in Word, Excel, and other apps. Copilot will be a long-term growth driver for these Office apps, especially on the business side, where Office 365 commercial revenue grew 15% year over year last quarter.
But the cloud-computing opportunity is still alive for the software giant. Azure and other cloud services posted a 31% year-over-year revenue increase last quarter, with AI demand responsible for seven percentage points of that increase.
Microsoft is also gaining share in online search as it rolls out AI search features to Bing and its Edge web browser. Microsoft's search and news-advertising revenue exceeded management's expectations last quarter, representing another channel to monetize AI.
Microsoft is a relatively safe way to invest in AI due to the recurring revenue streams from various software services. The company's $86 billion of net income over the last year more than doubled over the past five years, and it has great prospects to keep that streak going.
