These companies trade at valuations that understate their prospects.
Leading artificial intelligence (AI) companies continue to report strong growth into the new year. This suggests that this investment cycle may last longer than some investors expect. morgan stanley predicts that AI productivity gains will account for 20% of economic growth next year.
To reap significant profits from this opportunity, all you need to do is invest in proven winners that are delivering profitable growth and trading at reasonable valuations. Here are two top AI stocks that meet this requirement.
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microsoft
microsoft‘s (MSFT +2.00%) The recent decline is a great buying opportunity. While some Wall Street analysts may be unsure about the company’s aggressive capital spending plans, the software leader is quietly establishing long-term leadership in AI software. The company used $77 billion of free cash flow in the trailing 12 months to invest in data centers, software development and chips. This allows Microsoft to achieve long-term growth.
Notably, Microsoft has demonstrated that it can turn these investments into revenue growth. For example, paid seats in Microsoft 365 Copilot grew 160% year-over-year last quarter, showing that companies are paying extra to give their employees access to AI capabilities.
Today’s changes
(2.00%) $7.86
current price
$401.53
Key data points
Market capitalization
3.0 trillion dollars
daily range
$392.92 -$401.79
52 week range
$344.79 -$555.45
volume
2.3M
average volume
30M
gross profit
68.59%
dividend yield
0.85%
Microsoft aims to spread AI across the economy and drive growth. During the company’s recent earnings call, CEO Satya Nadella said: [total addressable market] As this adoption accelerates and spreads, we will see significant growth across all layers of the technology stack. ”
These developments make the stock a solid investment. The stock trades at a forward price/earnings ratio (P/E) of 25 times, making the valuation seem reasonable. Analysts expect the company’s earnings to grow at an annualized rate of 14%.
Nvidia
Microsoft is a solid stock that profits from demand for AI software, but Nvidia (NVDA +8.01%) Provides powerful graphics processing units (GPUs) that enable AI. The company has led the GPU market for nearly 20 years and is well-positioned in the AI infrastructure boom.
Today’s changes
(8.01%) $13.77
current price
$185.65
Key data points
Market capitalization
$4.5 trillion
daily range
$174.62 -$187.00
52 week range
$86.62 -$212.19
volume
8.9 million
average volume
183 million
gross profit
70.05%
dividend yield
0.02%
There are only two major suppliers of general purpose GPUs. This allows Nvidia to price products with high returns that benefit shareholders. As it happens, the company generated $77 billion in trailing-12-month free cash flow (the same as Microsoft), but Nvidia has been growing much faster, with total revenue increasing 62% year over year last quarter.
Nvidia’s main competitive advantage in the AI chip market is innovation. The company’s free cash flow is increasing and it is devoting more resources to research and development, solidifying its lead. Nvidia now offers complete systems such as small AI supercomputers for hyperscalers that combine hardware, networking, and software into one platform. The upcoming Rubin platform features six new chips that will reduce the cost of AI usage for enterprises.
Nvidia’s advantage is understated. The company has a long history of growth and innovation, and investors can buy the stock at a forward P/E of 24. This is impressive considering that analysts are modeling the company’s revenue to grow at an average annual rate of 37% over the next few years.
