Over the past few years, investors have rushed to get into artificial intelligence (AI) stocks of any kind -- from chip designers to software companies and more. Companies developing or using AI represented, and continue to represent, potential winners over time. This is because AI is helping companies, organizations, and even individuals to become more efficient and innovative. And all of this could significantly boost the earnings of players involved in this revolution.
In recent times, though, one particular area of AI has emerged as possibly representing a big opportunity. I'm talking about AI infrastructure. This involves the platforms -- including chips and networking equipment, for example -- and data centers used to develop and advance AI projects. Cloud service providers invest in these and so do individual companies with major AI plans, such as Meta Platforms and Tesla.
Could AI infrastructure spending be the next gold rush for investors? Let's find out.
Image source: Getty Images.
The potential of AI
So, first, a bit of background on the AI story so far. Companies and governments have recognized the potential of AI to streamline processes and supercharge new projects, and as a result, many have turned to companies that may help them achieve such goals. They've sought out cloud service providers for access to AI chips to run workloads or have adopted voice AI technology or AI-driven software to immediately gain in efficiency and lower costs. This has lifted revenue at a variety of companies -- and their share prices too.
And since many of these players are weighted heavily in the S&P 500, this momentum has helped the benchmark roar higher, even reaching multiple new records this year.
Now, let's consider our question regarding AI infrastructure spending. Could this be the next gold rush? I don't have to tell you that investors always look for the next big opportunity, one that may power earnings and stock prices higher. This may involve a technology, such as Internet-related companies back in the late 1990s, or a theme, like today's weight loss drugs. (Weight loss drug giant Eli Lilly has seen revenue advance in the double digits and its stock price soar nearly 200% over three years.)
Demand for AI capacity
AI infrastructure spending clearly is positioned to be a key theme over the next few years, and here's why: One of the biggest needs right now is capacity for AI workloads -- and in some cases, customers have to scramble to gain access to it. Oracle (ORCL +4.75%) said earlier this year that one customer asked for all available capacity -- regardless of where it was located.
Moving forward, to meet customer demand, cloud service providers and companies running AI in-house must spend on infrastructure. Nvidia (NVDA +5.93%) chief executive officer Jensen Huang expects AI infrastructure spending to reach as much as $3 trillion to $4 trillion by 2030, suggesting this could be a major theme over the next few years.
NASDAQ: NVDA
Key Data Points
Which companies will benefit? Nvidia, Broadcom, and other chip and equipment providers should see gains in revenue as companies turn to them for the necessary products needed to expand and build out data centers.
At the same time, cloud companies, even as they're involved in spending during this phase, also should see ongoing strong demand for their products and services. After all, they're making this investment because they see a major business opportunity -- and one that's currently unfolding and developing. So, as they spend, they also are well positioned to start immediately benefiting too.
How to limit risk -- and still rush for gold
All of this suggests that AI infrastructure spending could be the next gold rush for investors. But, even though this is an exciting opportunity, it's important to keep in mind a couple of key points before you go all in on this theme. Yes, AI infrastructure seems promising, but some degree of risk exists -- any slowdown in the buildout or downturn in the economy could weigh on the growth of the companies involved and on their share prices.
That's why it's essential to diversify across a variety of stocks and industries instead of focusing on only one or two.
My second point is this: Always choose companies with strong long-term prospects, so even if stock performance stumbles at a particular moment in time, you'll have confidence that the stock will recover and go on to gain over the years to come.
With these ideas included in their strategy, investors may take part in this exciting new gold rush -- and minimize their risk.
