Two Potential AI Stocks that Might Secure Your Finances for the Long Term
The demand for generative AI services, capable of producing fresh content instead of solely reprocessing existing data, is rapidly increasing. OpenAI's ChatGPT and Microsoft's Copilot, alongside other comparable tools, are drawing in more users and businesses, fueling this surge.
Through 2032, analysts anticipate a compound annual growth rate (CAGR) of almost 40% for the generative AI market. To capitalize on this trend, two artificial intelligence (AI)-focused stocks with the potential for substantial returns are being suggested: AMD (AMD -2.83%) and ServiceNow (NOW -2.38%).
1. The chip manufacturer: AMD
AMD serves as the second-largest producer of x86 CPUs and discrete GPUs globally. It competes primarily against Intel (INTC -2.12%) in the CPU market and Nvidia (NVDA -2.25%) in the GPU market. Since Lisa Su took over as its CEO a decade ago, AMD has recorded a compound annual growth rate (CAGR) of 17% in revenue from 2014 to 2023, with continued profitability throughout the past five years.
While AMD isn't heavily invested in the AI market, like Nvidia, its recent growth is attributed primarily to its new Instinct data center GPUs, which deliver comparable performance to Nvidia's H100 workhorse GPUs at a reduced cost. Additionally, AMD has also seen an increase in Epyc CPU sales to challenge Intel's Xeon CPUs in servers, and it has expanded its programmable chip business to solidify its presence in the data center market.
At the beginning of 2024, AMD predicted it could generate $2 billion in data center GPU revenue for the year. By the end of the third quarter, this outlook was elevated to at least $5 billion, representing 19% of the company's estimated annual revenue.
As the generative AI market ignites growth in AMD's data center business, sales of its Ryzen CPUs for PCs are surging, with Intel facing challenges in ramping up production of its Meteor Lake chips. Unlike Intel, AMD outsources its manufacturing to TSMC to avoid the fabrication issues faced by its larger competitors over the past decade.
Through 2026, analysts expect AMD's revenue to grow at a CAGR of 21% as its EPS increases at a CAGR of 103%. Although valued at 43 times forward earnings, AMD still has room for further growth as the AI market expands.
2. The software creator: ServiceNow
ServiceNow's cloud-based platform converts disorganized work patterns into organized digital workflows, aiding companies in more efficient expansion and cost reduction. As well as supporting hybrid and remote workers.
ServiceNow began trading publicly in 2012, with its revenue rising at a CAGR of 39% from 2012 to 2023. The company became profitable on a generally accepted accounting principles (GAAP) basis in 2019, with net income growing at a CAGR of 29% over the four years following. Even in the face of tough economic headwinds, such as the pandemic, geopolitical conflicts, inflation, and rising interest rates, ServiceNow has continued to grow.
The company remains resilient in times of economic downturn as companies often seek to streamline their workflows and minimize costs. Furthermore, ServiceNow’s data-rich platform serves as a foundation for new AI services. During its latest conference call in October, CEO Bill McDermott declared that the company had transformed into the "AI platform for business transformation," having simplified the complexities of 20th-century enterprise systems.
ServiceNow's recent growth is predominantly driven by its Now Assist platform of generative AI services, which automates and accelerates tasks through AI agents. The number of customers spending over $1 million annually on its Now Assist services reached 44 at the conclusion of the last quarter, with McDermott praising the platform as the company's "fastest-growing product ever" and a significant catalyst for cross-enterprise expansion.
Through 2026, analysts project ServiceNow's revenue and EPS to grow at a CAGR of 21% and 10%, respectively. Despite its pricey valuation at 60 times forward adjusted earnings, ServiceNow may continue to command this premium as it reaps the benefits of the ongoing expansion in the cloud software, digital workflow, and AI markets.
Based on the current market trends, investing in AMD could be beneficial due to its strong performance in the data center market, driven by the demand for generative AI services. AMD's predicted revenue growth of 21% by 2026 and its competitive advantage in manufacturing through outsourcing to TSMC, make it an appealing option for investors interested in the AI sector.
ServiceNow, with its cloud-based platform that simplifies workflows and reduces costs, has seen impressive growth in its AI-driven Now Assist platform. The company's focus on AI services and its status as a "AI platform for business transformation" could lead to further revenue and EPS growth at a CAGR of 21% and 10% respectively, making it an attractive option for investors in the cloud software and AI markets, despite its current high valuation.
