Artificial intelligence (AI) is the biggest trend driving gains in the stock market since the start of the current bull market in October 2022. Companies have collectively added trillions of dollars to their market caps thanks to massive growth in AI spending and the opportunities generative artificial intelligence unlocks. But the AI boom may still have a long way to go.
Generative AI cloud infrastructure could grow to a $470 billion market by 2032, growing at an average rate of 30% from 2022, according to forecasts from Bloomberg Intelligence. Meanwhile, the analysts expect software spending for things like specialized AI assistants and workflow improvements to grow 71% per year to reach a combined $318 billion.
High expectations for growth throughout the tech industry have led some stocks to soar in price, but there are still plenty of opportunities left for investors. With just $500, you could buy any one of the following stocks at a price that's more than fair. As AI spending continues to climb, these stocks should all benefit.
NASDAQ: MSFT
Key Data Points
1. Microsoft
Microsoft's (MSFT 5.33%) early investment in generative AI pioneer OpenAI put it in a great position to capitalize on the growth of AI spending for both its cloud infrastructure and its enterprise software.
The company's Azure AI service provides developers access to leading large language models, including GPT-4o, on its cloud infrastructure. It counts over 60,000 customers for the service, up 60% year over year in the most recent quarter.
Management also notes that the average customer is spending more as well. That helped push Azure revenue to 33% year-over-year revenue growth.
Management thinks it has a lot more growth ahead of it. It forecasts accelerating Azure revenue growth as more of its 2024 capital investments come online, and it adds more capacity to meet the growing demand for its AI cloud infrastructure services.
Meanwhile, Microsoft's AI agent, Copilot, is seeing strong adoption across its enterprise software suite. Its Github Copilot, which helps software developers write code and improve workflows, is the most widely adopted AI development tool. It pushed Github to a $2 billion revenue run rate last quarter.
Microsoft has since adapted Copilot for general knowledge work in Microsoft 365, and it's seen rapid adoption. The number of people using it daily doubled sequentially last quarter.
Microsoft stock trades around 32 times analysts' estimates for 2025 earnings, as of this writing. That's certainly a premium price, but Microsoft has several factors supporting that level. Not only is it a leading AI company on two fronts, but it uses billions of dollars in free cash flow every quarter to repurchase shares, making future earnings more valuable for long-term shareholders. With the share price currently sitting around $420, there's still time to buy this AI giant.
NASDAQ: ADBE
Key Data Points
2. Adobe
Adobe (ADBE 0.50%) makes essential software for any digital creative. It's the company behind Photoshop, Premiere Pro, and Illustrator, and it's developing AI models to help creatives using its software get the most out of their tools.
Some investors worry that generative AI tools that can create images and videos could displace the need for some of Adobe's software. But Adobe unveiled several improvements to its generative AI model, Firefly, last month that indicate AI is more of a benefit to its business than a threat. Firefly video generation for Premiere Pro, for example, can create commercially safe edits and fills, saving filmmakers time and resources. They won't have to reshoot an entire scene just to correct a tiny mistake.
Management is monetizing its AI capabilities by offering tiered subscription offerings, add-ons that provide more access to AI tools, and direct AI access with Firefly services for creatives and GenStudio for marketers.
Its free Adobe Express service also integrates its Firefly model to "enable creativity for all," as management says. The free service acts as a funnel to bring in new customers to Adobe's software suite, and it's working well. Management says potential customers that come to it through Express convert better into paid subscribers.
Adobe shares trade for less than 25 times analysts' estimates for 2025 earnings, as of this writing. That's a great price to pay for a company that should see steady revenue growth as customers pay up for its AI tools. Growing scale on the back of its AI investments should lead to modest margin expansion in the future as well, supporting strong earnings growth. Your $500 is just enough to buy a single share of this stalwart software provider that's making some of the best AI tools for its industry.
NASDAQ: GOOG
Key Data Points
3. Alphabet
Many see the growth of AI assistants like ChatGPT as a major threat to Alphabet's (GOOG +6.99%) (GOOGL +7.12%) core Google Search business. But Alphabet is investing heavily in AI to make sure that doesn't become the case.
AI Overviews at the top of Google Search results have led to greater engagement and satisfaction among users, according to management. Other AI-driven features like Circle to Search in Android phones and Google Lens are driving search traffic to Search as well.
That's important, because generative AI could have a meaningful impact on Google's advertising business over the long run. Google's AI model is called Gemini, and the company is infusing it into nearly every one of its marketing tools. Gemini helps advertisers create and test hundreds of different ads with different copy or images.
Google's AI tools also help marketers direct their ad budgets toward higher-performing ads faster, maximizing their spend. Lastly, Google's AI tools can help measure conversion using predictive analytics now that many users block direct ad attribution from sites and apps.
Meanwhile, Google Cloud remains one of the biggest public cloud providers, and it's benefiting greatly from the growth in AI infrastructure spending. Google Cloud revenue grew 35% in the third quarter, reaching $11.4 billion. The segment's operating income grew to $1.9 billion, from $266 million last year, and there's still a long way for it to ramp up its margin, based on results from the competition. That could lead to strong overall earnings growth over the next few years.
Alphabet shares trade for just 20.3 times analysts' 2025 earnings estimate, as of this writing. With the potential growth from AI-powered marketing and spend on Google's cloud infrastructure, it's well positioned to grow earnings at a strong rate that more than justifies that price for years to come.
Analysts currently expect Alphabet earnings to grow at an average rate of 22% per year for the next five years, making its current price multiple look like an absolute steal. With $500, you could pick up multiple shares of Alphabet, giving you multiple ways to invest in the future of AI.
