These AI-powered stocks have a sustainable competitive advantage and can help you generate phenomenal profits.
Investing in artificial intelligence (AI) stocks has been gaining momentum in recent years. More and more companies across industries are adopting advanced AI technologies to increase cost efficiencies and improve productivity and decision-making. As a result, many of these companies expect to see increased revenue and profits in the coming years.
Still, stock investors should be cautious about the excitement surrounding the AI industry. If they want to benefit substantially from this long-term trend, they should focus on AI-enabled companies with sustainable competitive advantages and solid financial strength, such as Advanced Micro Devices (AMD 0.34%) and Nvidia (NVDA 1.46%).
Here's why market analysts expect these companies to be great AI stock choices in the long term.
Advanced Micro Devices: 76% upside potential
Chip designer Advanced Micro Devices reported stellar second-quarter data, with revenue and profits beating analyst expectations. Analysts were also pleased with the company's third-quarter 2024 revenue guidance and increased full-year revenue outlook for its data center AI chip division. Melius Research analyst Ben Reitzes set a very aggressive price target of $265 for AMD shares. The target suggests a 76% upside potential over the next year or so.
Nvidia is the undisputed leader in the data center AI market. AMD is working hard to grab a larger share of this high-margin market with its competitively priced and rapidly expanding AI chip portfolio. The company has built high-bandwidth memory capacity into its new Instinct MI300 GPU, making it ideal for AI inference workloads. AMD reported quarterly MI300 sales exceeding $1 billion for the first time in the second quarter. AMD has also significantly improved its ROCm software stack to support the hardware, making it easier for clients to train AI models on the platform.
AMD is also preparing to launch new AI accelerators with higher memory capacity and computational performance, including the MI325X series in the second half of 2024, the MI350 series in 2025, and the MI400 series in 2026. AMD's recent acquisition of ZT System, a leading AI infrastructure provider for hyperscalers, for $4.9 billion is expected to strengthen the company's penetration into the rapidly expanding AI market. The company also acquired Silo AI, Europe's largest private AI lab, to access top talent in the AI industry.
Meanwhile, AMD already has a strong presence in the global CPU market. The company has already seen robust adoption of its 4th Gen EPYC server CPUs by cloud providers and large enterprises. The company is also expected to launch its 5th Gen EPYC processors in the second half of 2024. AMD held 24.1% unit share and 33.7% revenue share of the data center CPU market in Q2 2024.
AMD's second-quarter gross margin was 53%, up 340 basis points from the same period last year, and the company expects margins to continue to increase in future quarters as it gains share of the AI market.
AMD's stock is trading at 10.9 times trailing 12-month sales, above its five-year average price-to-sales multiple (P/S) of 9.2. However, a premium valuation seems justified given the company's rapidly expanding presence in the data center and server CPU markets and improving margins. Therefore, even at current high levels, the stock could be an attractive pick.
Nvidia: 95% upside potential predicted
Stock market darling semiconductor giant NVIDIA has seen its shares rise 159% so far in 2024. But according to Eric Jackson, a hedge fund manager at EMJ Capital, the company's stock could reach $250 per share by the end of 2024, with room for 95% more upside. Jackson's argument is based on the fact that NVIDIA's forward price-to-earnings (P/E) ratio (until very recently) was lower than the average forward P/E over the past five years. In the past five years, NVIDIA's forward P/E has exceeded 50 three times and hovered around 70 twice. Given NVIDIA's projected growth rates for 2025 and 2026, investor enthusiasm is likely to push valuation levels closer to these peak levels in the coming months.
While Jackson's predictions may seem decidedly bullish, investor optimism about the company is well-founded. Nvidia will hold 92% of the U.S. data center GPU market in early 2024 and 65% of the global data center AI chip market in 2023. The company's full-stack platform approach, which includes a full ecosystem of AI-optimized hardware chips and software systems, network solutions and development frameworks, strengthens and expands the company's influence in the AI and high-performance computing markets. In addition, strategic partnerships with technology giants such as Meta Platforms, Amazon and Microsoft also play a key role in driving demand for the company's advanced chips and network components in areas such as data centers, healthcare, social media and autonomous driving.
Nvidia has strong pricing power for its AI chips and has reported strong gross margins. Its flagship H100 chips currently sell for $25,000 each, and technological superiority and ongoing supply shortages allow Nvidia to raise prices for its next-generation H200 and Blackwell architecture chips. As such, the company's margins are likely to remain high for the next few quarters.
Taking all these factors into account, buying at least a small amount of Nvidia stock now might be a smart move.
Randi Zuckerberg, former director of market development and communications at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool's board of directors. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, and NVIDIA. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
