The artificial intelligence (AI) boom has, thus far, been mostly built on the foundation of hardware. The expensive data centers that power AI have fueled massive spending on the processors that give AI its smarts.
Chipmakers have benefited immensely as a result. Nvidia, the hands-down leader in AI processors with an estimated 90% of the market, has seen its share price rise 950% over the past three years. Taiwan Semiconductor Manufacturing, which manufactures most of the world's most advanced processors, has seen its shares pop nearly 250%.
However, there are some compelling reasons why the next AI boom will be more focused on software and services. Here's why the transition could already be underway and why Alphabet (GOOGL +0.26%) (GOOG +0.29%) may be one of the biggest winners.
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1. The $2 trillion AI cloud opportunity
One of the biggest opportunities in the AI market that's just getting started is artificial intelligence cloud services. This can include everything from AI services such as chatbots to intelligent cloud products used for research and AI model training.
Infusing nearly every cloud service with artificial intelligence is creating a massive opportunity, with Goldman Sachs estimating global AI cloud revenue could reach $2 trillion by 2030.
Alphabet has a unique opportunity here because the company has a long list of cloud services, including Google Workspace, Gemini 3, Google Cloud, and others. And there's already proof that the company's AI implementation is working. The tech giant has 650 million monthly active Gemini users now, and Alphabet's third-quarter cloud revenue -- which houses most of its AI services -- rose by 34% to $15.1 billion. What's more, the company says that 70% of its Google Cloud customers are using its AI services already.
2. Autonomous vehicles are creating a $2.3 trillion market
A gold rush is already brewing to utilize AI to bring about significant changes in automation. And one of the biggest opportunities -- aside from humanoid robotics -- is autonomous vehicles (AVs). Alphabet's Waymo is already a leader in this space and has self-driving services in five cities across the country, with plans to expand to three more cities soon.
Waymo is the de facto leader in this space in the U.S. and already has 16 years of development and more than 100 million miles of real-world driving experience. The benefit of this lead will eventually be huge for Alphabet, given that self-driving cars will be worth $2.3 trillion by 2030.
NASDAQ: GOOGL
Key Data Points
3. Advertising and search are still thriving in the AI era
And finally, advertising in the AI age was a big question not long ago, but Alphabet has turned this potential problem into a benefit. The company's advertising revenue rose 12.6% in the third quarter to $74.1 billion.
Here's what Alphabet CEO Sundar Pichai said on the earnings call about his company's ad sales:
AI is driving an expansionary moment for Search. As people learn what they can do with our new AI experiences, they are increasingly coming back to search more. Search and its AI experiences are built to highlight the web, sending billions of clicks to sites every day.
There's no guarantee that AI will continue to fuel growth for the company's search tools, but so far, artificial intelligence hasn't spurred the demise of Google Search that investors once feared.
With Alphabet's leading position in AI software and the company already seeing significant benefits from the AI cloud and advertising -- as well as huge potential from autonomous vehicles -- the company is perfectly positioned to benefit from the next AI boom no matter where it comes from.
