Generative AI Market Booms: Key Stocks to Watch for Significant Gains
The demand for generative AI services is skyrocketing. Tools like OpenAI’s ChatGPT and Microsoft’s Copilot are attracting more users and businesses, which is driving growth in this sector.
Analysts predict that between 2024 and 2032, the generative AI market will see a compound annual growth rate (CAGR) of nearly 40%. For investors looking to benefit from this trend, two notable stocks in the artificial intelligence (AI) sector are AMD (NASDAQ: AMD) and ServiceNow (NYSE: NOW), both of which show potential for impressive returns.
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AMD: A Leader in Chip Production
Advanced Micro Devices (AMD) ranks as the second-largest producer of x86 CPUs and discrete GPUs globally. The company faces stiff competition from Intel (NASDAQ: INTC) in the CPU market and Nvidia (NASDAQ: NVDA) for GPUs. Under CEO Lisa Su’s leadership, AMD’s revenue experienced a CAGR of 17% from 2014 to 2023, maintaining profitability over the past five years.
While AMD’s exposure to AI is less than Nvidia’s, recent advancements in its Instinct data center GPUs are helping drive growth. These GPUs offer performance comparable to Nvidia’s H100 models, but at a lower cost. AMD is also gaining traction with its Epyc CPUs against Intel’s Xeon CPUs in server applications, alongside expanding its programmable chip offerings.
At the start of 2024, AMD projected its data center GPU revenue at $2 billion. However, by the end of the third quarter, this outlook was revised upward to at least $5 billion, accounting for 19% of its anticipated annual revenue.
As the generative AI market continues to grow, AMD experiences strong PC sales due to Intel’s production challenges. Unlike Intel, which produces most of its chips in-house, AMD partners with TSMC to avoid manufacturing issues that have plagued Intel over the past decade.
Analysts expect AMD’s revenue to increase at a CAGR of 21% from 2023 to 2026, with earnings per share (EPS) rising at 103%. Currently, the stock is valued at 43 times its forward earnings, presenting potential for further growth in the expanding AI market.
ServiceNow: Streamlining Workflows with AI
ServiceNow’s cloud-based platform assists organizations in converting chaotic work patterns into organized digital workflows. By doing so, companies can grow more efficiently, lower costs, and provide better support for remote and hybrid workers.
Since going public in 2012, ServiceNow has increased its revenue at a CAGR of 39%, achieving profitability in 2019. From then on, net income grew at a CAGR of 29% despite facing significant economic challenges such as the pandemic, geopolitical tensions, inflation, and rising interest rates.
ServiceNow’s resilience in turbulent times can be attributed to companies often looking to streamline operations during downturns. The platform serves as a solid foundation for launching new AI services. In its latest earnings call, CEO Bill McDermott stated that ServiceNow has cemented its role as “the AI platform for business transformation.”
The company’s Now Assist platform, which utilizes generative AI, has significantly boosted efficiency across tasks. By the end of the latest quarter, 44 clients were spending over $1 million annually on Now Assist services, making it the fastest-growing product in ServiceNow’s history and key to future expansion.
Looking ahead, analysts predict ServiceNow’s revenue and EPS will rise at CAGR rates of 21% and 10%, respectively, from 2023 to 2026. Although not cheap at 60 times its adjusted forward earnings, ServiceNow might maintain its premium due to its position in the expanding markets of cloud software, digital workflows, and AI.
Investment Opportunities
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Intel, Microsoft, Nvidia, ServiceNow, and Taiwan Semiconductor Manufacturing. Recommendations include long January 2026 $395 calls on Microsoft and short calls on Intel and Microsoft options. The Motley Fool adheres to a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
