Over the last three decades, Wall Street has entertained no shortage of next-big-thing investment trends. Since the advent of the internet changed the long-term growth trajectory for corporate America, investors have been waiting for the next innovation that would alter the business landscape. The rise of artificial intelligence (AI) might just be the unicorn the investment world has been waiting for.

Relying on software and systems for tasks that would normally be assigned to humans gives AI utility in almost every sector and industry of the market. Last year, PwC released a report (“Sizing the Prize”) which estimated that global consumption-side benefits and productivity gains from AI would translate into a $15.7 trillion boost to the global economy by 2030.

Figures like this are why we’ve witnessed the foundation of the AI revolution, semiconductor stock Nvidia (NASDAQ: NVDA), gain nearly $1.9 trillion in market cap in 16 months. But make no mistake about it; tougher sledding lies ahead.

Image source: Getty Images.

Though Nvidia has benefited immensely from AI, it could underperform for years to come

In fiscal 2024 (Nvidia’s fiscal year ended on January 28), Nvidia recorded $47.5 billion in sales from its Data Center segment, which was a 217% improvement from the prior-year period. The fuel behind this stellar sales improvement is its A100 and H100 graphics processing units (GPUs).

Nvidia’s GPUs have become a staple in high-compute data centers. In particular, the H100 is the preferred choice by businesses aiming to train large language models and support generative AI solutions. All of the top cloud-infrastructure service platforms globally are deploying Nvidia’s H100s in their AI-accelerated data centers.

Exceptionally high demand for Nvidia’s scarce AI-GPUs has also led to otherworldly pricing power for the company. Whereas net sales rose 126% for Nvidia in fiscal 2024, its cost of revenue climbed by a far more modest 43%. This gap was almost entirely wedged by Nvidia’s superior pricing power on its AI-GPUs.

These competitive advantages have pushed Nvidia’s stock higher by 500% since the start of 2023. However, maintaining these gains could prove difficult, if not impossible, with headwinds mounting.

The obvious concern is that Nvidia isn’t going to be the only fish in the pond. Intel recently unveiled its Gaudi 3 AI-accelerated chip, while Advanced Micro Devices is in the process of increasing production of its MI300X GPU. Both of these chips are direct threats to Nvidia’s H100 dominance in high-compute data centers.

Perhaps the bigger worry lies within. Nvidia’s four largest customers by net sales — Microsoft, Meta Platforms, Amazon, and Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) — are purchasing Nvidia’s H100 GPUs as well as developing their own AI-accelerated GPUs. It’s evident these four industry titans aim to lessen their reliance on Nvidia or replace it entirely in the years to come.

Furthermore, there hasn’t been a next-big-thing trend or innovation over the last 30 years that didn’t endure an early bubble-popping event. Investors have a propensity to overestimate the adoption, uptake, and importance of new innovations, and AI is unlikely to be the exception to this historical precedent.

All signs point to Nvidia stock struggling in the years to come and likely underperforming the broad-market indexes.

Thankfully, two time-tested businesses have the catalysts necessary to handily outperform Nvidia in the return column over the next three years.

Berkshire Hathaway CEO Warren Buffett has crushed the S&P 500 over nearly six decades. Image source: The Motley Fool.

Berkshire Hathaway

The first magnificent stock that shouldn’t have any trouble leaving Nvidia in the dust over the next three years has little to do with the AI revolution and everything to do with spotting amazing values hiding in plain sight. I’m talking about conglomerate Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), which has been led by billionaire CEO Warren Buffett since the mid-1960s.

Though past performance is no guarantee of future results, the “Oracle of Omaha,” as Buffett has come to be known, has nearly doubled up the average annualized total return, including dividends, of the benchmark S&P 500 since the mid-1960s. On an aggregate basis, Berkshire has outperformed the S&P 500 by close to 4,900,000 percentage points!

Buffett’s recipe for success effectively boils down to three key points: cyclical stocks, dividend stocks, and share repurchases.

With regard to the former, Buffett and his investment aides, Todd Combs and Ted Weschler, have packed Berkshire’s $372 billion investment portfolio with cyclical businesses — i.e., companies that ebb and flow with the health of the U.S. economy.

While Berkshire’s brightest minds are well aware that recessions are a normal and inevitable part of the economic cycle, they rightly understand that periods of expansion last substantially longer than downturns. With this in mind, they’ve positioned Berkshire Hathaway’s investments and roughly five dozen owned businesses, including insurer GEICO and railroad BNSF, to benefit from long-winded economic expansions.

Second, the Oracle of Omaha and his team have a penchant for buying shares of companies that pay a regular dividend. Public companies that pay a dividend are usually profitable on a recurring basis and capable of providing transparent long-term growth outlooks.

More importantly, dividend stocks have outperformed non payers over the long run. According to a recently updated report from the Hartford Funds, in collaboration with Ned Davis Research, income stocks have delivered an annualized return of 9.17% over the last half-century (1973-2023). By comparison, non-payers generated a more modest annualized return of just 4.27% over the same timeline.

Lastly, Warren Buffett is a huge fan of repurchasing his own company’s stock. Since the covenants governing buybacks were altered by Berkshire Hathaway’s board in July 2018, he’s green-lit the purchase of more than $74 billion worth of his company’s shares. These buybacks are lifting Berkshire’s earnings per share (EPS) and incrementally increasing the ownership stakes of existing shareholders.

Alphabet

The second magnificent stock that can crush Nvidia in the return column over the next three years is one of Nvidia’s top customers: Alphabet. Alphabet is the parent of internet search engine Google, streaming site YouTube, cloud-infrastructure service platform Google Cloud, and autonomous vehicle company Waymo, among other ventures.

Most of Wall Street is buzzing after the cash-rich Alphabet announced its first-ever quarterly dividend ($0.20 per share). Alphabet ended March with a treasure chest that contained $108 billion in cash, cash equivalents, and marketable securities, so it can certainly afford to pay a dividend without adversely affecting its innovative capacity.

However, Alphabet’s new dividend isn’t the catalyst that’ll help it outperform Nvidia through 2027. Rather, it’s the company’s foundational search engine and rapidly growing cloud segment that’ll do the trick.

For more than a decade, Google has been Alphabet’s proverbial money tree. It’s practically a monopoly, with a more than 91% share of worldwide internet search in the month of March. In fact, you have to go back more than nine years to find the last time that Google didn’t account for at least a 90% share of global internet search. As the clear go-to for businesses wanting to reach consumers with their message(s), Alphabet shouldn’t have any trouble commanding exceptional ad-pricing power in most economic climates.

But what’s really exciting about Alphabet is the rapid rise of Google Cloud. Cloud-infrastructure service spending is still in its early innings of expansion, and Google Cloud has already grown into the world’s No. 3 cloud-infrastructure service platform by aggregate spend (as of September 2023).

More importantly, cloud margins are considerably more robust than advertising margins, and Google Cloud has been a profitable segment for Alphabet in each of the past five quarters. In short, this segment can meaningfully boost Alphabet’s operating cash flow in the years to come.

The final selling point is that Alphabet is remarkably cheap. Whereas shares of Alphabet can be purchased right now, at a fresh all-time high, for less than 15 times estimated cash flow in 2025 — a 17% discount to its average multiple-to-cash flow over the trailing-five-year period — Nvidia is valued at nearly 28 times forecast cash flow in its upcoming year.

The table is set for Alphabet to handily outperform Nvidia over the coming three years.

Should you invest $1,000 in Berkshire Hathaway right now?

Before you buy stock in Berkshire Hathaway, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of April 30, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Berkshire Hathaway, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.