These 4 Core Artificial Intelligence (AI) Hyperscalers Are Crying Buys Today

Artificial intelligence (AI) hyperscalers are one of the most popular investments today. The Big Four are also often cited as spending the most on data center capital expenditures. However, including other pure plays like OpenAI and Anthropic would add a significant amount to this total.

The four major AI hyperscalers are: microsoft(NASDAQ: MSFT), alphabet(NASDAQ:GOOG)(NASDAQ:Google), Amazon(NASDAQ:AMZN)and meta platform(NASDAQ:Meta). Companies are spending hundreds of billions of dollars in data center capital investment this year to meet the demand for AI.

Despite the huge expense, each seems like a solid investment at this point.

In addition, these four companies also have core businesses that are self-funded. largely of their spending. All four companies are solid long-term investments, and I think investors could reap significant returns if AI can be effectively monetized over the next decade.

Four core businesses will fund AI promise

For Microsoft, its core business is business productivity software. The company’s business is most closely tied to AI, as these tools can be integrated into Microsoft’s core products and through its cloud computing platform, Azure.

In fact, Microsoft’s AI business has an annual operating rate of $37 billion and is growing at a rate of 123%. Azure increased its revenue by 40%, demonstrating strong demand for its computing capabilities. That kind of growth rate justifies Microsoft’s heavy spending on data centers to maintain it, and will make it a force to be reckoned with in the AI ​​space for some time.

Amazon’s commerce business is strong, but it doesn’t actually have a direct connection to building broader AI. Instead, Amazon Web Services (AWS) is spending all the money.

But investors should probably think of Amazon more as a computing company that happens to do commerce. In the first quarter, AWS accounted for 59% of Amazon’s operating profit, making it the company’s primary revenue driver. Amazon’s commerce business can still benefit from AI improvements, but the primary beneficiary will be AWS. AWS saw a huge 29% revenue increase in the first quarter, the highest in nearly four years.

Amazon is also the biggest spender on capital equipment this year, with spending expected to be $200 billion. But if Amazon can continue to accelerate the growth rate of AWS, it will be worth it in the end.

Alphabet’s main business is advertising, and Google search is its cash cow. Alphabet is also driving its own AI model, Gemini, and integrating it into its core search business. But the company’s Google Cloud business is growing faster than AWS and Azure, increasing 63% in the first quarter.

If Alphabet can maintain its growth rate over the next few years, it will be well-positioned to take the company to new heights. If Gemini also becomes the go-to AI model, it will put additional workload on Google Cloud’s servers, further benefiting the company.

The odd company in this group is Meta Platforms. The company’s main business is advertising on social media platforms such as Facebook, Instagram, Threads, and WhatsApp. Advertising makes up nearly all of Meta’s revenue.

Although Meta has some AI tools built into its advertising platform, it doesn’t actually have a true AI revenue stream like the other three. Meta had considered starting a cloud computing business, but now uses all available computing in-house.

Meta has several products in development, including AI glasses and a personal superintelligence model, but these have not been released to date and there is no guarantee that they will work. As a result, the market has become somewhat skeptical of Meta’s AI spending. However, that’s why it’s the best deal among the four.

AI hyperscalers range from expensive to inexpensive

All four companies are growing relatively quickly, so future earnings are the best tool to evaluate them. From this perspective, Meta Platforms is the cheapest, but that’s probably because you’re spending a lot of money without getting anything back. Amazon, on the other hand, is the most expensive because it has high growth prospects and is probably the most resilient core business.

MSFT PE Ratio (Futures) Data by YCharts

None of these stocks have very high stock prices relative to their growth rates. If AI can make a meaningful contribution to all four companies, the stock would be a strong buy here.

I think investors are already seeing the benefits of three of these companies. Alphabet, Microsoft, and Amazon offer powerful cloud computing products. Meta is currently working on developing AI products, which could also bring significant benefits.

Keithen Drury has held positions at Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.