Investing in artificial intelligence (AI) stocks may seem like a high-risk proposition, given just a handful of companies may eventually capture the disruptive and rapidly expanding market. So, it makes sense to invest in market leaders and benefit from outsized gains over time. Given these factors, here are two soaring AI stocks that aren’t just hype.
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Alphabet stock
Valued at US$2 trillion by market cap, Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) is among the largest companies in the world. It is the parent company of Google, YouTube, and the Android operating system. Today, the company generates a majority of its revenue from advertising, but it is also gaining traction in other verticals such as public cloud and AI.
In the past decade, GOOGL stock has returned over 450% to shareholders, easily outpacing the broader markets. Its growth story is far from over, given ad sales in the June quarter rose 11% year over year, accounting for 76% of the top line.
Google Cloud sales are well-positioned to benefit from robust AI demand. Several companies building generative AI models need storage space for data as well as the computing power to train these models. In the second quarter (Q2), Google Cloud sales rose by 29% year over year, increasing total revenue by 14%. Alphabet’s asset-light business model allows it to benefit from high operating leverage, as it grew adjusted earnings by 31% year over year in the June quarter.
In the last 12 months, Alphabet’s free cash flow stood at US$44.2 billion, or US$4.88 per share. Comparatively, it pays shareholders an annual dividend of US$0.80 per share, indicating a yield of 0.5% and a payout ratio of just 16.4%.
Down 14% from all-time highs, GOOGL stock is priced at 21.4 times forward earnings and trades at a discount of almost 40% to consensus price target estimates.
Microsoft stock
Microsoft (NASDAQ: MSFT) is a big tech giant that has already gained an early-mover advantage in AI. Valued at US$3.07 trillion by market cap, Microsoft initially invested US$1 billion in OpenAI, the parent company of ChatGPT, in 2019. In the last five years, Microsoft’s investment in OpenAI has swelled to US$13 billion, and it is among the largest shareholders in the AI juggernaut.
Now, Microsoft is also the exclusive provider of computing power for OpenAI. As several companies have integrated their products with OpenAI, the workloads operating on Microsoft’s cloud servers have increased significantly.
Last year, Microsoft began selling the Microsoft 365 Copilot AI add-on for subscribers of its Office applications. The feature, which costs US$30 per person per month, can add US$10 billion in annual sales by 2026, according to Piper Sandler.
Microsoft continues to grow at an enviable clip and is forecast to increase sales from US$245 billion in fiscal 2024 (ended in June) to US$279 billion in 2025. Comparatively, earnings are on track to expand from US$11.8 per share to US$13.08 per share in the next 12 months.
Microsoft also pays shareholders an annual dividend of US$3 per share, while it ended fiscal 2024 with a free cash flow per share of US$9.97. The tech behemoth trades at a 20% discount to consensus price target estimates.
