Nvidia is significantly larger than almost every company in the world. However, that doesn't mean it will necessarily stay that way. A lot can happen over five years, and I think two companies will pass Nvidia in size over the next five years: Alphabet (GOOG +0.98%) (GOOGL +1.11%) and Amazon (AMZN +1.93%). Both happen to be involved in artificial intelligence (AI) as well, and I think they make for better buys than Nvidia right now.
Nvidia's lead over these two isn't insurmountable
First, let's figure out how much of a head start Nvidia has on these two companies. While Nvidia is third in the world's largest company race, Alphabet and Amazon are fourth and fifth, respectively. So, predicting these two will be larger than Nvidia isn't an outlandish bet. Alphabet's and Amazon's stocks would need to rise by 29% and 48%, respectively, to surpass Nvidia. Over five years, this isn't too much of a gap to close.
NASDAQ: GOOGL
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But what makes these two better picks than Nvidia? For the record, Nvidia is the best AI company right now. That doesn't mean it will stay in that position over the next five years. Any company involved in the AI arms race is currently loading up on graphics processing units (GPUs) made by Nvidia. This is to equip themselves with the most powerful computing devices available on the market so they can create accurate AI models quickly.
Eventually, this demand will be satisfied, and Nvidia's revenue may retract as fewer companies create new AI-dedicated servers and replace them when they are worn out. After this phase, much of the demand will center around who can provide AI models or infrastructure to run them on.
Alphabet and Amazon are massive players in the cloud computing industry, so this sets them up well for the next phase of AI investing. Cloud computing is a vital platform in AI proliferation because it allows companies that don't have the means or the need for a supercomputer at all times to run heavy workloads like AI models. By outsourcing these workloads over the cloud to platforms like Google Cloud or Amazon Web Services (AWS), more companies have access to the computing power they need to run AI models.
Additionally, each has AI development tools and generative AI models that developers can access through these cloud platforms. Cloud computing will be the next primary beneficiary of the AI gold rush, and it's already seeing strong demand.
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Cloud computing business had a strong Q1
Even before AI became a huge draw to these platforms, cloud computing excelled. However, each company has been doing phenomenally recently. In the cloud computing world, three stand out: AWS, Microsoft Azure, and Google Cloud (ranked in terms of market share).
AWS has a massive market lead over its competitors due to its first-mover advantage, and the mature business unit produces some outstanding numbers. In the first quarter, AWS had sales of $25 billion, with an operating income of $9.4 billion. That equates to an outstanding 38% operating profit margin, which shows how profitable these platforms can get when they have reached a mature state.
Google Cloud is much smaller. Its revenue was $9.6 billion in Q1, growing at a 28% pace, and its operating margin was 9%. This shows how much room Google Cloud has to expand its margins, so this could become a large profit driver over the next few years.
Cloud computing will be the next primary beneficiary of the AI movement. As a result, I think the big three in cloud computing will be worth more than Nvidia five years from now (even though Microsoft is already larger than Nvidia).
