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A recent report from UBS Global Wealth Management estimates that artificial intelligence revenue will reach $1.2 trillion by 2027. The analysts believe “AI will be the most profound innovation and one of the largest investment opportunities in human history.”
The report breaks the investment opportunity into three layers: (1) the enabling layer, (2) the intelligence layer, and (3) the application layer. Listed below are three brilliant AI stocks (one for each layer) that billionaires were buying in the second quarter.
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Andreas Halvorsen of Viking Global Investors bought 1.3 million shares of Nvidia (NASDAQ: NVDA).
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Ken Griffin at Citadel Advisors bought 1.1 million shares of Amazon (NASDAQ: AMZN).
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David Shaw at D.E. Shaw & Co. bought 689,000 shares of Datadog (NASDAQ: DDOG).
Here’s what investors should about those stocks.
1. Nvidia: The enabling layer
UBS analysts define the first stage of the artificial intelligence (AI) boom as the enabling layer. It comprises semiconductor companies and public clouds that provide infrastructure and platform services required to develop AI applications. UBS estimates revenue from the enabling layer will total $516 billion by 2027.
Nvidia fits neatly into this category. The most obvious reason for its inclusion is dominance in data center graphics processing units (GPUs). Nvidia accounted for 98% of data center GPU shipments last year, and it holds 90% market share in AI chips according to Morgan Stanley analyst Joseph Moore. Forrester Research recently wrote, “Without Nvidia’s GPUs, modern AI wouldn’t be possible.”
Nvidia also provides software libraries and developer tools through its CUDA platform that streamline the building of GPU-accelerated applications. Additionally, the company has also launched a complete AI-as-a-service product called DGX Cloud. It brings together supercomputing infrastructure, pretrained machine learning models, and software that support AI application development across use cases ranging from autonomous robots to recommender systems.
Looking ahead, Nvidia is well positioned to hold its leadership position in AI chips despite increasingly tough competition from semiconductor companies like AMD and Broadcom. To quote Forrester Research, “The company’s innovation, roadmap, and vision are clear and have kept it moving at lightspeed compared to other semiconductor manufacturers for AI chips.”
Wall Street expects Nvidia’s earnings to compound at 37% annually over the next three years. That consensus makes the current valuation of 57 times earnings look like a reasonable entry point. Those figures give a PEG ratio of 1.5, which is a material discount to the three-year average of 3.1.
2. Amazon: The intelligence layer
UBS analysts define the second stage of the artificial intelligence boom as the intelligence layer. It comprises companies that use data assets to build the large language models (LLMs) and machine learning models that power artificial intelligence applications. UBS estimates revenue from the intelligence layer will total $255 billion in 2027.
Amazon fits neatly into the first and second categories. Amazon Web Services, the largest public cloud in terms of revenue, provides access to infrastructure and platform services that support the development of AI models and applications. Amazon Bedrock is one example. It’s a generative AI development platform that lets businesses fine-tune pretrained models, including the Titan family of models developed by Amazon.
Additionally, Amazon shoppers spend $443,000 per minute on the marketplace, according to Goldman Sachs. That affords the company a deep understanding of consumer tastes and preference, and its generative AI shopping assistant (Rufus) uses that information to answer questions and make product recommendations. As of Sept. 18, Rufus is officially available to all U.S. customers.
According to a recent survey of IT executives from Goldman Sachs, approximately 30% of applications run in public clouds today, but that number is projected to approach 50% in three years. As the largest public cloud, Amazon Web Services is uniquely positioned to benefit as demand for AI services increases, simply because it already has the largest customer base and partner ecosystem.
Wall Street expects Amazon’s earnings to increase at 22% annually over the next three years, which makes the current valuation of 45 times earnings look reasonable. Those figures give a PEG ratio of 2.1, a discount to the three-year average of 2.9.
3. Datadog: The application layer
UBS analysts define the third stage of the artificial intelligence boom as the application layer. It comprises companies that use data assets and models from the intelligence layer to develop AI software. UBS estimates revenue from the application layer will total $395 billion in 2027.
Datadog fits into this category. The company specializes in observability software. Its platform comprises a broad range of products that help businesses monitor, troubleshoot, and evaluate the performance of critical IT infrastructure and applications. Several products depend on AI. For instance, Watchdog is an AI engine that accelerates incident resolution by automating anomaly detection and root cause analysis
Similarly, Bits AI is a conversational interface that lets development and operations teams query observability data using natural language. It simplifies investigations, streamlines incident management, and speeds up the remediation of performance problems. Likewise, LLM Observability is a monitoring tool purpose-built for the large language models that power generative AI applications.
Research company Gartner recently ranked Datadog as a leading observability platform vendor for the fourth consecutive year. The company also has a strong presence in several individual observability verticals, such as log analysis, sever monitoring, and application performance monitoring. Additionally, Forrester Research has recognized its leadership in AI for IT operations.
Morgan Stanley analyst Sanjit Singh views Datadog as one of the software companies best positioned to monetize generative AI. Wall Street expects the company’s revenue to grow at 23% annually through 2026. That makes the current valuation of 17.9 times sales look like a reasonable entry point for patient investors.
Should you invest $1,000 in Nvidia right now?
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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. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Datadog, Goldman Sachs Group, and Nvidia. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
3 Brilliant AI Stocks Billionaires Are Buying for the 3 Stages of the Artificial Intelligence Boom was originally published by The Motley Fool
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