There are many stocks riding the artificial intelligence (AI) boom this year. I’m going to focus on the two that are on my buying list.
One aspect of AI software is the enormous demand for data processing power, all of which has to be housed somewhere. This is driving demand for hyperscale data centers (those over 100,000 square feet), which are exploding in size and number. The graph below shows the recent acceleration.
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Data centers
In 2024, the number exceeded 1,000; researchers expect that 120 to 130 will come online every year. Huge centers are being built by the technology giants. For example, Elon Musk’s xAI data center will be 750,000 square feet and house 100,000 GPUs, while Microsoft’s data center coming to Wisconsin will cover two square miles of land.
Why is this important for a company like Dell Technologies(NYSE: DELL)? These centers require infrastructure such as racks, storage, servers and software, which Dell provides.
Dell believes it will have a $91 billion AI infrastructure market by 2025, rising to $124 billion by 2027, and is one of its largest competitors in the market, Super microcomputer(NASDAQ:SMCI)has problems. Supermicro’s shares fell significantly after a short seller published a detailed report alleging financial wrongdoing and his accountant resigned, indicating potentially serious accounting problems. This could mean Dell gets more sales while Supermicro deals with the fallout.
Driven by data centers, Dell’s servers and networks revenue reached $7.7 billion last quarter, a spectacular 80% year-over-year growth. Dell’s total revenue last quarter was $25 billion, up 9% year over year, and operating income rose 15% to $1.3 billion. Dell’s PC sales have struggled as the economy slows and little has changed this fiscal year. However, Dell thinks there could be an upgrade cycle driven by AI-enabled computers, although this remains to be seen. Data center sales will likely be the main profit driver from now on.
Investors who like dividends and stock buybacks will like Dell’s operating strategy. The company is committed to returning 80% of its free cash flow to shareholders through these channels. The dividend was recently increased by 20% to $0.445 per share per quarter, for a yield of 1.3%. The company also repurchased $1.4 billion worth of shares in the first two quarters of fiscal 2025 (ending August 2). This is 1.6% of the current market capitalization bought back in just six months.
Dell’s stock trades at a price-to-earnings ratio of 24; however, this drops to just 14 on a forward basis. Twenty-one of the 24 analysts covering the stock rate it a Buy or Strong Buy with an average price target of $146, or 12% above the current price. However, these targets could be low because they don’t yet take into account the additional revenue Dell is likely to gain as a result of the challenges Supermicro faces. The stock could rise quickly if Dell exceeds analyst expectations in the coming quarters.
Amazon is deeply entrenched in the AI race, most notably through Amazon Web Services (AWS), Amazon Bedrock (read more about it here), and AI chip development initiatives. AWS benefits immensely from the massive data needs of AI software as it is the largest cloud data provider in the world. Sales in this segment have increased over the past two quarters after a lull in 2022, as you can see below.
The 19% growth in the third quarter pushed AWS’s revenue to $27.5 billion this quarter. More telling, the segment generated $10.4 billion in operating income by a wide margin of 38%. The margin for the same quarter last year was 30%, which is clear evidence of the increasing demand for cloud data services.
Amazon’s total revenue for the third quarter grew 11% to $159 billion, and total operating income was $17.4 billion versus $11.2 billion in the prior year. Amazon’s operating cash flow has moved past stimulus-era peaks and shows no signs of slowing down, as shown below.
AMZN Cash from Operations (TTM) chart
Yet the stock is still historically undervalued, based on operating cash flow and earnings, as shown below.
AMZN Chart Price to CFO per share (TTM).
Wall Street may be cautious about Amazon as it expects a slowdown in consumer spending that would impact product sales; However, I believe the much more profitable AWS segment will fill any revenue gaps. The historical undervaluation makes the stock a great long-term buy.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Bradley Guichard has positions in Amazon and Dell Technologies. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Here are my best artificial intelligence (AI) stocks to buy right now (hint: Nvidia isn’t on the list) was originally published by The Motley Fool
