Nvidia‘s shares hit a record high in August 2023, as demand for its data center graphics cards shows no signs of slowing down. With large enterprises now battling for dominance in the artificial intelligence (AI) landscape, this semiconductor stock seems almost invincible.
However, investors should be cognizant of the risk of supply shortages of AI chips while putting their money in Nvidia. Given the high demand for its H100 chips and the possibility of panic buying, Nvidia’s top-line growth may be affected at least in the short run.
Given this backdrop, it might be more prudent for retail investors to opt for other fundamentally strong AI stocks in September. Here’s why Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) fit the bill.
A leader in enterprise software as service, technology giant Microsoft’s shares have surged by 39% so far this year. While the company’s fourth-quarter revenue and earnings performance (ending June 30) has been ahead of consensus estimates, the slow growth outlook for its AI services seems to have underwhelmed investors.
Despite this, the primary allure of investing in Microsoft is undeniably its growth potential in AI — driven by its $13 billion investment in ChatGPT developer OpenAI. The strategic alliance with OpenAI has given Microsoft exclusive licenses to several of OpenAI’s large language models, helping it supercharge its offerings such as Bing, Microsoft 365, and Azure with AI capabilities.
Azure is the only cloud platform with access to OpenAI’s large language models and is also OpenAI’s exclusive cloud provider. Hence, Microsoft stands to benefit dramatically from the increasing adoption of ChatGPT. Azure OpenAI service (which gives Azure customers access to several of OpenAI’s large language models) was used by 11,000 customers at the end of the fourth quarter, a significant jump from the 2,500-strong customer base at the end of the third quarter.
Microsoft has also unveiled plans to monetize Microsoft 365 Copilot, a virtual AI assistant for the Microsoft 365 suite, at $30 monthly per user. Besides earning incremental revenue from existing Microsoft 365 users opting for this feature, the utility of Copilot may attract new customers to Microsoft. At the end of the fiscal third quarter (ending March 31), 382 million people (paid seats) were using the Office 365 suite. The Copilot subscription can also help switch a significant number of Office 365 users to the costlier Microsoft 365 subscription.
Besides growth opportunities in AI, Microsoft is riding several secular tailwinds in areas such as cloud computing, cybersecurity, and business productivity. The global cloud computing market is expected to grow from $580 billion in 2023 to $1.24 trillion in 2028 according to Mordor Intelligence. Being the second dominant cloud infrastructure player with a 22% market share, Azure will benefit from this market expansion. Further, cybersecurity is also emerging as a new frontier for the company.
Hence, while the stock seems pricey at over 11.7 times trailing-12-month sales, Microsoft’s diversified product portfolio and AI-driven edge can make it a compelling choice for investors — especially if they opt for a dollar-cost averaging strategy.
Amazon’s stock has been a hot topic in 2023, with a remarkable 61% surge so far this year, marking its longest growth streak in two decades. This growth seems even more impressive considering that in 2022, the company was riddled with higher labor and logistics costs and saw share prices drop by nearly 50%.
As Amazon continues to invest heavily in AI software and hardware (computation power, large language models, proprietary chips), the stock may continue to grow even higher in the coming months. The company is leveraging its market-leading position (32% share as of the end of June) in the cloud infrastructure market to rapidly add several AI-enabled services to its cloud computing platform, Amazon Web Services (AWS). Prominent among them is Amazon Bedrock service, which enables clients to build customized generative AI applications with proprietary data and several large language models on AWS.
Amazon has been investing heavily in AI for the past 25 years, as is evident from several AI-powered products such as Amazon SageMaker, Amazon Rekognition, and Alexa. The company has also launched a pair of custom AI chips, Trainium and Inferentia, for training and inference of large language models. The market has been taking notice of these efforts and Amazon is now attracting thousands of customers for its AI offerings.
The rapid adoption of big data, machine learning, and AI has also spurred growth in the cloud computing market. In the second quarter, AWS revenue grew by 12% year over year to $22.1 billion — a stable performance despite enterprises focusing on cost-cutting. Its e-commerce business is also showing signs of improvement. Meanwhile, advertising revenue grew by 22% year over year in the second quarter. With huge troves of personalized purchase data, a large base of third-party sellers on its platform, and robust AI capabilities, advertising is well positioned to emerge as a major profit driver in the future.
Despite the many pros, Amazon is trading at 2.6 times trailing-12-month sales — even after the huge share price surge in 2023. Considering its AI prowess, diversified business model, and many tailwinds, investors can consider picking a small position in this top-notch AI stock.
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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. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.