These industry leaders should dominate for years.
Historically, technology has been a ripe field to look for monster winners in the stock market. The Nasdaq-100 Technology Sector index returned 411% over the last 10 years (including dividend reinvestment), blowing away the blue chip-heavy Dow Jones Industrial Average‘s return of 205%.
There are exciting opportunities in technology as enterprises scramble to implement artificial intelligence (AI) in their operations. Here are two profitable tech companies that can deliver outstanding returns.
The data center market is exploding. Dell’Oro Group forecasts spending on AI-related infrastructure in the cloud and data center markets to grow 24% per year over the next five years. This is a monster opportunity for Nvidia (NVDA 5.46%), the leading supplier of AI chips.
Nvidia’s revenue more than doubled over the last year. Its graphics processing units (GPUs) are used by every major cloud service provider, and it has a large base of millions of developers and AI researchers using its accelerated computing platforms to build AI applications. Nvidia has built a reputation for high performance in the GPU market over the last 20 years, and that should serve the company and its shareholders well in the AI era.
Nvidia is profiting big time off its AI chip lead. It generated $46 billion in free cash flow on $96 billion of revenue over the last year, which has sent the stock soaring, but the company’s run is not over just yet.
Data centers are turning to Nvidia’s chips to speed up the training of AI models. Faster training means lower computing and energy costs, which is why data center spending is not showing signs of slowing down. The power these data centers require could increase by 160% by 2030, according to Goldman Sachs. Nvidia could see more growth in its data center segment as it addresses this need.
Nvidia’s Blackwell computing platform launching later this year will help companies bring generative AI applications to market faster while reducing energy consumption up to 25 times over the previous generation. Analysts expect Nvidia to grow earnings at an annualized rate of 36% over the next several years. That’s more than enough for shareholders to double their money by 2029.
Alphabet‘s (GOOGL 2.00%) (GOOG 2.03%) Google is one of the most valuable brands in the world, and it is rolling out AI across all its products which could benefit its growth prospects.
Alphabet reported strong financial results over the last year as the digital ad market recovered. Revenue grew 14% year over year in Q2, up from the year-ago quarter’s 7% growth rate. Google continues to invest in improving its products with new versions of its Gemini AI models while still posting a solid 25% year-over-year increase in operating income.
Google’s dominance in Search helped it bring in $64 billion in advertising revenue last quarter — a year-over-year increase of 11%. AI should drive more usage of Google’s products and grow its ad revenue over the long term. For example, the new AI Overview feature has already helped millions of users get answers to topics. Google has found that people who use AI Overview tend to use Search more frequently.
While analysts expect earnings to grow at double-digit rates over the long term, the stock continues to trade at a relatively low price-to-earnings ratio against those growth expectations. One reason for this is government scrutiny over Alphabet’s dominance. The company recently lost an antitrust case over anticompetitive behavior. But this doesn’t take away from Alphabet’s advantages in having quality data to train AI models, in addition to enormous cash resources and billions of users across its products.
The stock’s modest valuation is too attractive to pass up. Analysts expect the company to post 14% earnings growth in 2025, which is more than enough to justify a modest forward P/E of 18. Investors should earn magnificent returns over the next five years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, and Nvidia. The Motley Fool has a disclosure policy.
