Leading artificial intelligence (AI) companies continue to report solid growth as they enter the new year. That’s a sign that this investment cycle may take longer than some investors expect. Morgan Stanley estimates that productivity gains from AI will account for 20% of economic growth next year.
Investing in proven winners that are generating profitable growth and trading at reasonable valuations is all you need to benefit handsomely from this opportunity. Here are two top AI stocks that fit these requirements.
Where to invest $1,000 right now? Our team of analysts has just revealed what they believe are the 10 best stocks to buy right now, by joining Stock Advisor. See the actions »
microsoft‘s (NASDAQ:MSFT) The recent drop is a great buying opportunity. Some Wall Street analysts might be unsure about the company’s aggressive capital spending plans, but the software leader is quietly positioning itself for a long-term leadership in artificial intelligence 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.
In particular, Microsoft is showing that it can turn those investments into revenue growth. For example, paid Microsoft 365 Copilot positions increased 160% year over year last quarter, indicating that companies are paying more to give their employees access to AI features.
Microsoft is positioning itself for AI to spread throughout the economy and drive growth. On the company’s recent earnings conference call, CEO Satya Nadella said, “Our (total addressable market) will grow substantially across all layers of the technology stack as this diffusion accelerates and spreads.”
These developments make the stock a solid investment. The valuation appears reasonable, with the stock 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%.
Microsoft is a solid stock to benefit from demand for AI software, but NVIDIA (NASDAQ: NVDA) 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.
There are only two leading general-purpose GPU vendors. This allows Nvidia to price its products to benefit shareholders with high margins. Coincidentally, it generated $77 billion in free cash flow over the past 12 months (same as Microsoft), but Nvidia is growing much faster, with total revenue up 62% year over year in the latest quarter.