There are two sides to the artificial intelligence (AI) revolution. There is hardware, which includes data centers filled with advanced semiconductors designed to train AI models. Then there’s software, which includes chatbots like OpenAI’s ChatGPT, plus the expanded suite of cloud computing services that help businesses develop their own AI applications.
Most Wall Street forecasts suggest that AI will add trillions of dollars to the global economy in the next decade alone, and if that proves correct, investors could benefit from owning hardware and software stocks with exposure to the industry.
Here’s why investors with $1,000 to spare might want to split it evenly among the chip giant’s shares Micron Technology (NASDAQ: MU) and cloud computing company DigitalOcean (NYSE: DOCN).
1. Micron Technology
When you think of AI chips, Nvidia is probably the company that first comes to mind. The most advanced AI models to date have been developed using Nvidia’s graphics processing units (GPUs) for the data center. Micron, on the other hand, makes memory and storage chips, which are becoming extremely important in the AI race. The company even has Nvidia as a customer.
Micron makes the world’s best high-bandwidth memory for the data center. It helps GPUs process data at high speed by storing it in a standby state (think of it as the GPU’s short-term memory). Micron’s new HBM3E architecture offers superior performance over previous memory generations while occupying a smaller physical footprint. It also consumes 30% less power than competing products, helping data center operators save money on electricity costs.
In fact, Nvidia is using Micron’s HBM3E solution for its new H200 GPU, which can perform AI inference at twice the speed of the H100 while consuming half the amount of power. Micron’s high-bandwidth memory for the data center is so popular that it’s completely sold out for both 2024 and 2025. This gives the company incredible pricing power, which should translate to faster growth of revenues and profits over the next two years.
But AI is quickly migrating to computers and personal devices. Next-generation AI smartphones require up to twice as much memory bandwidth as their predecessors, which translates into more revenue for Micron. Right now, every tier 1 manufacturer of Android-powered AI smartphones (incl Samsung) uses Micron’s LPDDR5X memory chip, which offers up to 16 gigabytes of capacity.
Micron generated $6.8 billion in revenue during the last fiscal 2024 third quarter (ended May 30), which was a whopping 81% increase from the year-ago period. Its computing and networking (data center) business delivered 85% revenue growth, and its mobile segment’s revenue rose 94%. Both results are attributed to the demand for AI, which is likely to expand in the coming years.
Micron’s 2024 fiscal year will end on Aug. 31, but its bottom line financial results will be hurt by a weak start to the year as the company grappled with inventory issues. However, Wall Street expects the company to generate $9.54 in earnings per share in the next fiscal year 2025, which puts the stock at a price-to-earnings (P/E) ratio of just 14.
of iShares Semiconductor ETF (which holds the majority of major chip stocks) trades at a P/E ratio of 39.1 right now, which means Micron’s stock will need to rise 179% over the next year just to trade in line with its peers. industry. But if AI adoption continues to grow, the stock could do even better in the long term.
2. DigitalOcean
The cloud computing industry is dominated by tech giants like Amazon AND Microsoft that offer a growing number of services to help businesses integrate AI into their operations. These providers typically cater to large, complex organizations because they spend more money, but DigitalOcean operates a cloud platform designed specifically for small and medium-sized businesses, ranging from startups to those with up to 500 employees.
DigitalOcean offers cheap and transparent pricing, personalized support, and an easy-to-use platform because most small businesses don’t have in-house technical teams. It also keeps prices low by offering a very narrow portfolio of services, including simple data storage, web hosting, and software development tools.
However, DigitalOcean bought a company called Paperspace for $111 million last year to make AI accessible to its budget-conscious customers. Paperspace manages data centers designed specifically for AI development, with a selection of GPU options headlined by Nvidia’s H100. The price can be 70% cheaper than an equivalent service on Microsoft Azure, for example, because Paperspace is an agile business with a very specific set of services (similar to DigitalOcean), so it has a lean cost structure. Plus, Paperspace doesn’t lock customers into contracts, so they only pay for what they use.
This arrangement could offer tremendous synergies in the long term. Some estimates suggest that over three-quarters of businesses are already using or experimenting with AI, and if that’s the case, most of DigitalOcean’s customers could eventually use Paperspace. This will translate into additional revenue for the company at almost no additional expense (beyond the cost of buying Paperspace itself).
In fact, DigitalOcean CEO Paddy Srinivasan said the company’s annual recurring revenue for AI services grew at an annualized rate of 128% in just three months between December 2023 and March 2024. He said demand for GPU capacity of DigitalOcean’s AI will outpace supply for the foreseeable future, so growth will likely remain elevated for some time.
DigitalOcean expects to generate up to $775 million in total revenue by 2024, so it’s barely scratched the surface of its addressable market, which management estimates today at $114 billion. AI, of course, can significantly increase this possibility. With a market capitalization of just $3 billion as of this writing, DigitalOcean could bring significant returns to investors over the long term.
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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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, DigitalOcean, Microsoft, Nvidia and the iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends the following options: long January 2026 $395 Microsoft calls and short January 2026 $405 Microsoft calls. The Motley Fool has a disclosure policy.
2 Artificial Intelligence (AI) Stocks to Buy for $1,000 and Hold for Decades was originally published by The Motley Fool