Artificial Intelligence (AI) Chipmakers vs. Software Companies: Here Are My Picks
The artificial intelligence (AI) market expanded rapidly over the past few years as more companies recognized the value of crunching large amounts of data to make smarter decisions. Advertisers tapped AI algorithms to craft better targeted ads, autonomous vehicles used AI to spot and avoid obstacles, and large organizations used AI tools to automate tasks and streamline their operations.
The growing popularity of generative AI platforms like OpenAI's ChatGPT and DALL-E, which allow users to create new content instead of just analyzing existing data, further reinforced the notion that the AI market had plenty of room to expand. According to Fortune Business Insights, the generative AI market could grow at a stunning compound annual growth rate (CAGR) of 47.5% from 2023 to 2030 -- so the right AI growth stocks could still generate big multibagger gains.
AI companies often fall into two categories: the chipmakers that produce the chips for processing those complex AI tasks, and the software makers that develop the AI applications for collecting and crunching all of that data. So today, I'll share my top chipmaking and software plays for the booming AI sectors.
The top two chipmakers: Nvidia and Micron
Nvidia (NASDAQ: NVDA) is the most important AI chipmaker in the world. Its high-end data center graphics processing units (GPUs) are used to process complex AI tasks for most of the world's leading AI companies, including OpenAI, Microsoft (NASDAQ: MSFT), Amazon, and Alphabet's Google.
Nvidia's GPUs process a large range of numbers simultaneously. That makes them better suited for handling AI tasks than traditional CPUs, which still process a single piece of data at a time. The rapid growth of the AI market sparked a buying frenzy in Nvidia's top-tier data center GPUs, and its revenue surged 126% in fiscal 2024 (which ended this January) as its adjusted EPS soared 288%. Analysts expect its revenue and adjusted EPS to jump another 81% and 90%, respectively, in fiscal 2025 -- but its stock still looks reasonably valued at 38 times forward earnings in the context of soaring business growth.
Micron (NASDAQ: MU) is one of the world's largest producers of memory chips. It manufactures denser and more power-efficient chips than its larger rivals, and that technological edge makes it a great fit for data centers that want to process AI tasks more efficiently. But in fiscal 2023 (which ended last August), Micron's revenue tumbled 49% and it posted a net loss for the full year as it grappled with a tough cyclical slowdown.
Those declines were caused by the PC market's post-pandemic slowdown, the end of the 5G upgrade cycle, macro headwinds for the industrial market, and regulatory challenges in China. But for fiscal 2024, analysts expect its revenue to rise 35% with a narrower loss as its core markets stabilize and more data centers upgrade their AI capabilities. Therefore, it might be a great time to buy Micron -- which looks quite affordable at six times this year's sales -- as its cyclical downturn ends.
The top two software makers: Microsoft and Snowflake
Microsoft is the top AI software maker for two simple reasons. First, it's a major investor in OpenAI, the world's hottest AI start-up. Second, it's integrating OpenAI's generative AI tools directly into its search engine, productivity software, and cloud-based services. Those moves enabled Microsoft to grow its cloud infrastructure platform Azure at a faster pace than its two largest competitors, Amazon Web Services (AWS) and Google Cloud Platform (GCP). It also gave it a shot at cracking Google's search engine dominance while widening its moat against other enterprise software makers.
Analysts expect Microsoft's revenue and adjusted EPS to grow 14% and 15%, respectively, in fiscal 2025 (which starts this July). It certainly isn't cheap at 32 times forward earnings, but its myriad strengths could justify that premium valuation.
Lastly, if we look behind the scenes, we'll see that Snowflake (NYSE: SNOW) is helping many large companies organize their data. Snowflake's cloud-based data warehouses are used to aggregate data from a wide range of computing platforms, then clean it all up so third-party data visualization and analytics applications can easily read it.
Snowflake's silo-busting approach made it a popular pick for large and fragmented organizations, and its recent integration of generative AI tools should make it even easier to process all that data. It aims to generate $10 billion in product revenue by fiscal 2029 (which ends in Jan. 2029), which implies it could grow at a CAGR of 30% from fiscal 2024 to fiscal 2029.
Snowflake isn't profitable yet and its stock looks a bit pricey at 15 times this year's sales, but its market could continue to expand as organizations gobble up more data for their AI applications.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Artificial Intelligence (AI) Chipmakers vs. Software Companies: Here Are My Picks was originally published by The Motley Fool
