These stocks have outperformed the market impressively in 2023. Despite skepticism from some corners, the future presents thrilling opportunities for businesses. Artificial intelligence stocks have become a significant force in the investment realm, with dominant technology and semiconductor stocks experiencing a surge in 2023 after a steep decline in 2022.
However, some voices have started to liken the AI upswing to the dot-com bubble, cautioning that a drop might follow the recent inflated interest and hype.
While it’s true that some AI stocks are currently priced high and could be perceived as overvalued, there is a considerable difference between the AI wave of today and the dot-com frenzy of the late 1990s. Unlike, for instance, a non-profitable or even pre-revenue start-up going public solely based on a “dot-com” in its name, many of the leading AI companies of today are large, established, and profitable.
Additionally, the potential of AI is expected to trigger exponential growth in the years to come, even for large-cap companies like the two leaders outlined below.
Microsoft
Microsoft, a titan in the software and cloud industry (NASDAQ: MSFT), initiated the recent AI upswing when its invested company, OpenAI, launched ChatGPT last November. The introduction of ChatGPT ignited a spark in the tech industry and beyond, awakening businesses to the transformative power of artificial intelligence.
After the groundbreaking launch of ChatGPT, Microsoft reinforced its initial investment in OpenAI with an additional $10 billion in January, raising its total investment to $13 billion, nearly half of OpenAI’s $29 billion valuation.
Now, Microsoft is incorporating OpenAI’s technology into all its business infrastructure, platforms, and software products. Microsoft is also leveraging its newfound AI capabilities to improve its products, such as Bing Search, that don’t already hold a dominant position.
During a February event, Microsoft detailed how OpenAI and ChatGPT are enhancing Bing’s functionality and accuracy, along with the Microsoft Edge web browser. This is significant as even slight improvements in the vast digital advertising industry could impact Microsoft, despite its already sizable stature. Microsoft CFO Amy Hood indicated that each percentage point of Search market share acquired translates to an additional $2 billion in high-margin revenue. Considering Bing currently only holds a 2.8% global search market share, the potential of gaining even a few points of claim could be substantial.
Even without this, Microsoft’s investment in OpenAI is likely to strengthen its competitive position in the cloud infrastructure wars and other enterprise productivity offerings where it is already dominant, such as the Dynamics enterprise resource planning suite, GitHub developer platform, the Power automation suite, and other pioneering tools for businesses.
Nvidia
Arguably, Nvidia (NASDAQ: NVDA) is even more representative of the AI revolution than Microsoft, and for a good reason. In its recent earnings report, Nvidia stunned analysts with its July quarter revenue projection of $11 billion, a significant leap from the $7.2 billion April quarter and about 55% higher than analyst consensus.
A broad range of businesses are investing heavily in their AI capabilities, and Nvidia is currently the premier provider of AI technology, with its general-purpose graphics processing units (GPUs) being the bedrock of today’s accelerated computing tasks. While traditional data centers have been primarily powered by central processing units (CPUs), the massive computing workloads for artificial intelligence training and inference require the parallel-processing capabilities of GPUs.
During the recent earnings call, CEO Jensen Huang highlighted two critical factors driving Nvidia’s high future expectations. Firstly, he mentioned the $1 trillion worth of global data centers primarily built with CPU architectures, which he expects to be gradually replaced by accelerated servers powered by GPUs, as generative AI and accelerated computing transition from the latest technology to tomorrow’s norm.
His claims have a basis, as research firm Trendforce noted earlier this month that despite robust growth in AI servers, the overall server market might decrease this year, given that AI-related servers account for less than 10% of total server shipments.
Huang’s second emphasis was on Nvidia’s competitive advantage. Despite the rise of AI attracting more start-ups and big chip names to the field, Nvidia has a considerable lead and a moat due to its CUDA programming platform. CUDA, developed by Nvidia in 2006, is a suite of software, programming libraries, and APIs that allow developers to program GPUs initially designed for computer graphics for accelerated computing applications.
With CUDA now being a standard platform for AI programming and Nvidia’s technological edge, it’s no surprise that investors are pushing Nvidia’s valuation up today.
Despite the skepticism surrounding the current surge of AI stocks, there’s no denying the transformative potential of artificial intelligence. Companies like Microsoft and Nvidia have shown how AI can redefine business capabilities and drive impressive growth. With large-scale, profitable operations and pioneering AI applications, these firms underscore why AI is more than a fleeting trend. As they continue to harness the power of AI, they offer a promising glimpse into the future of technology and business.
