The AI Revolution: Three Stocks Set to Thrive

Artificial intelligence (AI) has emerged as a pivotal force in the stock market throughout 2024, driving several companies to achieve record highs. While the excitement surrounding AI may seem overwhelming, it increasingly appears to be a significant technological advancement rather than a mere trend. For investors aiming to capitalize on this shift, here are three AI stocks worth considering for long-term investment.

1. Nvidia: The GPU Leader

Nvidia (NASDAQ: NVDA) began as a developer of graphics processing units (GPUs) designed to enhance video game graphics. These highly specialized chips utilize parallel processing, which breaks down complex computations into smaller tasks that can be solved simultaneously.

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This parallel processing power is essential for the quick rendering of high-resolution graphics. However, most computer calculations do not utilize this method, leaving central processing units (CPUs) as the primary chips in personal computers and devices.

Recognizing the potential applications of its GPUs beyond gaming, Nvidia launched a free software platform called CUDA, allowing users to program its chips for various tasks. This move established a strong competitive advantage for Nvidia. Over time, its GPUs have found applications in numerous sectors, including crypto mining, which further increased demand.

AI model training and operation require extensive computation and data processing that parallel processors excel at handling. Since 2015, major tech companies have been employing Nvidia’s GPUs for AI model training. The launch of ChatGPT by OpenAI in 2022 accelerated this trend, cementing Nvidia’s GPUs as the backbone of AI technology and driving its revenue growth.

With a rising need for GPUs to enhance AI capabilities, Nvidia is poised for continued growth. For instance, Meta Platforms and Elon Musk’s xAI are now utilizing ten times the GPUs for their latest software models compared to previous iterations.

Currently, Nvidia’s stock is trading at a forward price-to-earnings (P/E) ratio of less than 31 based on 2025 projections, making it a potential long-term investment.

Image source: Getty Images.

2. Microsoft: AI’s Early Adopter

Microsoft (NASDAQ: MSFT) has been at the forefront of AI, significantly investing in and partnering with OpenAI early in the game. This proactive approach has positioned Microsoft as a leader in AI development.

The company’s cloud computing platform, Azure, demonstrated impressive growth, with a 33% year-over-year increase in the first quarter of fiscal 2025 (ending September 30), up from 29% in the previous quarter. As demand for AI capabilities rises, Azure continues to experience capacity challenges, but management anticipates accelerated growth in the latter half of fiscal 2025 as more resources come online.

Microsoft is also incorporating AI into its various services. GitHub, which aids software developers, has significantly benefited from the introduction of GitHub AI Copilot, enhancing coding efficiency. Additionally, Microsoft has integrated AI tools into its productivity apps.

The Microsoft 365 Copilot, currently priced at $30 per user per month, offers extensive capabilities, from sorting emails in Outlook to crafting presentations based on user prompts. With its reasonable forward P/E ratio of 32 based on fiscal 2025 estimates, Microsoft appears well-positioned for long-term success.

3. Alphabet: Pioneering Cloud and Quantum Computing

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is achieving significant growth in its cloud computing segment, Google Cloud, which saw a jump from 29% year-over-year growth in Q2 to 35% in Q3. Notably, the segment’s operating income surged to $1.95 billion, up from $1.2 billion in Q2 and $266 million a year earlier, as the company leveraged the high fixed costs of its operations.

Alphabet’s recent technological innovations have also sparked investor interest. One standout is the introduction of its revolutionary Willow chip for quantum computing. Previous quantum computers struggled with errors, but Willow’s new error-correction technology minimizes mistakes as it scales with more qubits.

While widespread commercial use of quantum computing is still in the future, this breakthrough represents a key growth opportunity for Alphabet. Moreover, the company unveiled a new AI video generation platform, Veo 2, which has been touted as outperforming competing products in realism and quality. The launch of the Gemini model, slated for broader incorporation this year, underscores Alphabet’s commitment to advancing its AI capabilities.

Alphabet retains its dominance in online search and has significant potential to monetize previously untapped queries. Historically, Google has advertised on only about 20% of its search results, presenting considerable growth opportunities moving forward.

Currently, Alphabet’s stock trades at 18.5 times next year’s estimates, which suggests it is fairly priced given its strong growth prospects.

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*Stock Advisor returns as of December 30, 2024

Randi Zuckerberg, a former market development director and spokesperson for Facebook, and sister to Meta’s CEO Mark Zuckerberg, is on The Motley Fool’s board. Suzanne Frey from Alphabet also serves on this board. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Fool also recommends long January 2026 $395 calls and short January 2026 $405 calls on Microsoft. For more details, please read The Motley Fool’s disclosure policy.

The views expressed here are the author’s and may not reflect the opinions of Nasdaq, Inc.