Artificial intelligence (AI) spending is not showing signs of slowing down. Gartner expects worldwide spending to increase 44% this year to $2.5 trillion. This growth could benefit several companies that offer cloud computing services, advanced chips, and software. Here are three stocks that could benefit most from the AI spending boom.
1. Alphabet (Google)
As AI spending stretches into the trillions, the companies providing the backbone infrastructure for cloud services will be obvious winners. Alphabet (GOOG +0.92%) (GOOGL +1.04%) is one of the leading cloud computing providers. Google Cloud offers the complete stack across its Tensor Processing Units (TPUs), software tools, and expanding data center footprint.
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Google is benefiting tremendously as enterprises shift from experimentation to production in AI projects. Revenue from Google Cloud surged 48% year over year in the fourth quarter to reach nearly $18 billion. This growth was driven by a combination of higher spending from existing customers and Google winning larger spending commitments from new ones.
Google's AI capabilities are also spilling over to Search, with AI features driving increasing engagement from everyday users. These results show that the company is one of the top beneficiaries of the AI boom, yet investors can still buy Alphabet stock at a reasonable forward price-to-earnings (P/E) ratio of 26.
NASDAQ: GOOGL
Key Data Points
2. Advanced Micro Devices
Around half of data center spending goes toward computing hardware, like servers and chips. This favors Advanced Micro Devices (AMD +0.80%), which is seeing growing demand for its EPYC server central processing units (CPUs) and Instinct graphics processing units (GPUs). AMD scored major deals last year to supply chips to Oracle and OpenAI, and it just struck a similar agreement with Meta Platforms.
These deals strengthen the case for buying AMD, even for an investor who already holds Nvidia. Nvidia remains the dominant leader in GPUs, but AMD has a diversified portfolio of chip offerings that are also in high demand. AMD's revenue grew 34% year over year in the fourth quarter, led by its data center segment.
NASDAQ: AMD
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Importantly, AMD's surging free cash flow, up 129% last year, shows why the stock could be a rewarding investment. Analysts expect AMD's free cash flow to grow from $5.5 billion in 2025 to $19 billion by 2028, as higher margins from selling complex AI chip systems contribute more to its total revenue. The stock is trading at 18 times 2028 estimates, leaving room for upside over the next several years.
3. Datadog
The recent launch of Anthropic's Claude CoWork AI agent, which can write code all on its own (among other tasks), is creating confusion on Wall Street around the competitive landscape in software. This has caused a sell-off in software stocks this year, including Datadog (DDOG +0.24%), as investors fear that autonomous agents could make it easier to create new software on the fly, disrupting established players.
But the increase in AI agents could actually benefit Datadog, making the stock's recent dip a potentially rewarding entry point for investors. Large enterprises can't trust an AI agent operating on its own. Agents need careful monitoring for security reasons. This could be a massive opportunity for Datadog, which offers a platform that monitors activity across a company's servers, software, and operations.
Datadog has over 4,300 customers spending at least $100,000 annually, and a 97%-plus customer retention rate, indicating high customer satisfaction. It's a bullish sign for the company's prospects that revenue growth accelerated in the fourth quarter, up 29% year over year.
NASDAQ: DDOG
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The emergence of AI agents is creating a fluid competitive environment, so investors should actively monitor Datadog's growth for signs of weakness. But unless the business starts to see weakening growth, investors should look at the dip as a buying opportunity. Analysts are currently modeling 50% annualized earnings growth over the coming years, yet the recent sell-off has pushed the stock's forward P/E down to 47 after the recent stock price haircut. This is an attractive valuation to start a position.
