Leading artificial intelligence (AI) companies continue to report robust growth as they enter the new year. That's a sign this investment cycle may have longer to run than some investors expect. Morgan Stanley estimates that AI productivity gains will account for 20% of economic growth next year.
Investing in proven winners that are delivering profitable growth and trading at reasonable valuations is all you need to profit handsomely from this opportunity. Here are two top AI stocks that fit the bill.
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Microsoft
Microsoft's (MSFT 1.39%) recent dip is a great buying opportunity. Some analysts on Wall Street might be uncertain about the company's aggressive capital spending plans, but the software leader is quietly positioning itself for long-term leadership in AI software. The company is using its $77 billion in trailing-12-month free cash flow to invest in data centers, software development, and chips. This is positioning Microsoft for long-term growth.
Notably, Microsoft is demonstrating it can turn those investments into revenue growth. For example, Microsoft 365 Copilot paid seats surged 160% year over year last quarter, indicating businesses are paying extra to give their employees access to AI features.
NASDAQ: MSFT
Key Data Points
Microsoft is positioning for AI to spread across the economy and drive growth. On the company's recent earnings call, CEO Satya Nadella said, "Our [total addressable market] will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads."
These developments make the stock a solid investment. The valuation looks reasonable, with the shares sitting at a forward price-to-earnings (P/E) multiple of 25. Analysts expect the company's earnings to grow at an annualized rate of 14%.
Nvidia
Microsoft is a solid stock to profit from demand for AI software, but Nvidia (NVDA 1.03%) supplies the powerful graphics processing units (GPUs) that enable AI. The company has led the GPU market for about 20 years, putting it in a lucrative position amid the AI infrastructure boom.
NASDAQ: NVDA
Key Data Points
There are only two leading suppliers of general-purpose GPUs. This allows Nvidia to price its products to benefit shareholders with high margins. Coincidentally, it generated $77 billion in trailing-12-month free cash flow (same as Microsoft), but Nvidia is growing much faster, with total revenue surging 62% year over year last quarter.
Nvidia's main competitive edge in the AI chip market is innovation. Its growing free cash flow is funneling more resources into research and development, solidifying its lead. Nvidia is now offering complete systems -- like miniature AI supercomputers -- for hyperscalers, combining hardware, networking, and software into a single platform. Its upcoming Rubin platform will feature six new chips and reduce the cost of using AI for enterprises.
Nvidia's dominance is undervalued. It has a long history of growth and innovation, and investors can buy the stock at a forward P/E of 24. This is a steal, given that analysts are modeling its earnings to grow at a compound annual rate of 37% over the next several years.
