Important points
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AI hyperscalers like Microsoft and Alphabet have posted double-digit revenue growth over the past three years.
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Vertiv, a leading power cooling company, and connectivity provider Arista Networks are growing their revenue and net income even faster.
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But the market has taken notice, and these AI infrastructures are trading at high valuations.
Last week, news broke that Sam Altman's OpenAI valued itself at $830 billion.
However, this nosebleed valuation was challenged by analysts who pointed to competition from rivals such as Anthropic and Anthropic. alphabetGoogle asked whether the current breakneck pace of artificial intelligence (AI) spending is sustainable.
Where to invest $1,000 now? Our team of analysts has revealed what they believe. Best 10 stocks Buy now. Continued “
Given the challenge of picking winners in this space, investors may want to keep an eye on the bust in the AI space. Surprisingly, many of them currently appear to be doing even better than the leading AI companies. Is the real money in AI in power cooling and connectivity?
Image source: Getty Images.
Where profits are growing
If you look at the revenue growth of the largest AI-focused companies that develop AI-powered software and solutions, you'll see some surprising numbers.
Alphabet, the maker of Gemini and a company that has invested heavily in AI capabilities, has increased its trailing 12-month (TTM) revenue by 37.3% over the past three years. and microsoft(NASDAQ: MSFT)is integrating AI applications such as Copilot into its products, which led to a 44% increase in TTM revenue over the same period.
These are impressive growth rates, especially for such a large company. But they pale in comparison to the revenue increases being experienced by some of the AI industry's enforcement actions.
VertiveHoldings(New York Stock Exchange: VRT)is a manufacturer of industrial cooling and electrical systems, including those used in data centers, and TTM's revenue has increased 70.4% over the past three years. TTM Revenue: Arista Networks(NYSE:ANET)which makes electrical switches and network infrastructure that are also critical to data centers, grew 92.8% during the period.
The role of AI infrastructure appears to be losing out to more traditional AI companies in terms of revenue growth.
Profits are growing even faster
It would be a different story if a company's revenue is growing but its profits are not, but this indicates that most of the revenue growth is being eaten up by increased expenses. However, the opposite seems to be happening. All of these companies have grown their net profits far faster than their sales over the past three years.
Microsoft's net income has increased 55.5% since December 2022, while Alphabet's net income has more than doubled to 107.2% in three years. But again, this number pales in comparison to Arista Networks' 148.2% net income increase and Vertiv's impressive 1,250% net income increase over the same period.
To be fair, Vertiv and Arista's net incomes of $1 billion and $3.4 billion, respectively, are much smaller than the tech giant's $100 billion-plus net income, but the point is that Vertiv and Arista are not only growing revenue faster than Alphabet and Microsoft, they're also growing profits faster.
premium rating
If you have the money for power cooling and connectivity, it seems like the market is already popular. Arista and Vertiv may be growing faster than their AI-powered competitors, but that rapid growth is also baked into their stock prices.
Looking at the forward price-to-earnings ratio (P/E), which accounts for short-term growth, we find that Microsoft and Alphabet have virtually identical forward price-to-earnings ratios of 30x and 29.7x, respectively. Compare that to Vertiv, which trades at a forward P/E of 40.6x, and Arista, which trades at a forward P/E of 45.8x. The difference is even more striking when looking at trailing earnings, with Vertiv's 63.2x and Arista's 50.2x significantly higher than Microsoft's 34.7x and Alphabet's 30.9x.
Of course, the fact that the market values makers of network switches, power connectors, and integrated cooling equipment more highly than makers of AI tools like Gemini and Copilot says a lot about where investors see the most potential for growth.
As AI becomes more powerful, we will likely pay a premium for these types of companies, but smart investors will keep a watch list of select AI companies and keep an eye out for potential short-term declines in stock prices that may present more attractive buying opportunities.
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John Bromels has held positions at Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, Arista Networks, and Microsoft. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
