Nvidia is the king of the first wave of artificial intelligence (AI) investment. Graphics processing units (GPUs) are being bought en masse by the largest cloud computing and AI modeling companies. Eventually, when they have all the computing power they want, Nvidia’s business will decline because no new computing capacity will be needed.
This will pave the way for a new wave of AI investment. If you want to capitalize on this trend, I think there are three companies that will do well.
Cloud computing is set to grow enormously
The next wave will benefit companies that are currently training and developing AI models or that are offering cloud computing services to companies developing AI. The key cloud computing players are Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT)And Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL)As market leaders, they have been among the largest buyers of Nvidia’s GPUs in recent quarters.
All three also have ties to generative AI models, with Amazon and Microsoft investing in and partnering with Anthropic and Open AI, respectively. Alphabet is developing its generative AI model, Gemini, in-house. Because all three companies have strong ties to top-tier generative AI models, they’ve positioned themselves well to provide users with the tools they need to build AI models.
However, a generative AI model for cloud computing customers is just the premise for a much bigger game. Many workloads are still processed on-site at enterprises around the world. While some of these workloads may never migrate to the cloud, many will. As a result, the cloud computing market opportunity is expected to grow from $676 billion in 2024 to $2.3 trillion in 2032, according to Fortune Business Insights.
Because it’s easy to scale up or down the compute power you rent in the cloud, it’s ideal for training internal AI models, as companies don’t have to continually purchase expensive compute power from companies like Nvidia. With the general trend toward the cloud being accelerated by AI demand, it’s clear that this will be a huge investment trend.
But are all three shares therefore worth buying?
All three stocks have unique price points
The problem with each of these companies is that cloud computing isn’t the only thing they do. While cloud computing remains one of the best performing (if not the best performing) segments in each of these companies, other core businesses drive the stock. And the prices you pay for the stock vary wildly.
Amazon is the most expensive, but that’s because it has the most potential in cloud computing. Amazon Web Services (AWS) is the market leader in cloud computing. But because Amazon’s side businesses are all fairly low-margin, AWS accounts for 64% of operating profit, despite only contributing 18% of revenue. This means that if AWS grows strongly, Amazon’s profits will increase rapidly, causing Amazon’s expensive valuation to fall rapidly.
While Amazon is technically more expensive from a forward price-to-earnings (P/E) ratio, I would argue that Microsoft is the most expensive. The company has been growing revenue steadily, but its profit margins have been relatively flat. As a result, there really isn’t much of an upside for Microsoft; it needs to maintain its status quo to keep its premium price tag.
Finally, there’s Alphabet, which is actually cheaper than the broader market (measured by the S&P 500, (which trades at 22.7 times forward earnings). Alphabet doesn’t have the premium valuation of its peers because it has lagged behind on several major product launches, but that doesn’t mean it can’t be a solid investment. Alphabet has a lot to gain from its cloud computing wing because it’s just starting to turn profitable and could provide a huge boost to earnings as it moves toward AWS-like margins.
All three cloud computing companies have their own advantages, but Amazon and Alphabet stand out as better investment options than Microsoft right now, based purely on their potential to increase profits.
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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. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Stocks to Profit From the Next Wave of Artificial Intelligence (AI) Investing was originally published by The Motley Fool
