If AI is going to stick around for the long term, investors might want to add these stocks to their portfolio.
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 is software, which includes chatbots like OpenAI's ChatGPT, plus the expanding suite of cloud computing services that help businesses develop their own AI applications.
Most Wall Street forecasts suggest AI will add trillions of dollars to the global economy in the coming decade alone, and if that proves to be accurate, investors could benefit from owning both hardware and software stocks with exposure to the industry.
Here's why investors with $1,000 to spare might want to split it equally between shares of chip giant Micron Technology (MU 4.60%) and cloud computing company DigitalOcean (DOCN 0.40%).
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 speeds by storing it in a ready state (think of it as the GPU's short-term memory). Micron's new HBM3E architecture offers superior performance to previous generations of memory, while occupying a smaller physical footprint. It also consumes 30% less energy 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 inferencing at twice the speed of the flagship H100 while consuming half the amount of energy. Micron's high-bandwidth memory for the data center is so popular that it's completely sold out for both 2024 and 2025. That gives the company incredible pricing power, which should translate to faster revenue and earnings growth over the next couple of years.
But AI is quickly migrating to personal computers and devices. Next-generation AI smartphones require up to twice as much memory bandwidth as their predecessors, which translates to more revenue for Micron. Right now, every tier 1 manufacturer of Android-powered AI smartphones (including Samsung) uses Micron's LPDDR5X memory chip, which offers up to 16 gigabytes of capacity.
Micron generated $6.8 billion in revenue during the recent fiscal 2024 third quarter (ended May 30), which was a whopping 81% increase from the year-ago period. Its compute and networking (data center) business delivered revenue growth of 85%, and its mobile segment revenue soared 94%. Both results were attributable to AI demand, which is likely to expand in the coming years.
Micron's fiscal 2024 will wrap up on Aug. 31, but its final financial results will be compromised by a weak start to the year because the company was grappling with inventory issues. However, Wall Street expects the company to generate $9.54 in earnings per share in the upcoming fiscal 2025, which places the stock at a forward price-to-earnings (P/E) ratio of just 14.
The iShares Semiconductor ETF (which holds most leading chip stocks) trades at a P/E ratio of 39.1 right now, which implies Micron stock would have to soar 179% over the next year just to trade in line with its industry peers. But if AI adoption continues to grow, the stock could do even better over the long term.
2. DigitalOcean
The cloud computing industry is dominated by tech giants like Amazon and Microsoftthat offer a growing number of services to help businesses integrate AI into their operations. Those providers typically serve large, complex organizations because they spend the most money, but DigitalOcean operates a cloud platform designed specifically for small and mid-sized businesses, ranging from start-ups 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 acquired 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. Pricing can be 70% cheaper than an equivalent service on Microsoft Azure, for example, because Paperspace is a nimble 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 deal could offer incredible synergies over the long term. Some estimates suggest over three-quarters of businesses are already using or experimenting with AI, and if that's the case, the majority of DigitalOcean's customers could eventually utilize Paperspace. That will translate to additional revenue for the company with almost no further expense (beyond the cost of the Paperspace acquisition itself).
In fact, DigitalOcean CEO Paddy Srinivasan said the company's annual recurring revenue for AI services surged at an annualized rate of 128% in just three months between December 2023 and March 2024. He said demand for DigitalOcean's AI GPU capacity will outstrip supply for the foreseeable future, so growth will probably remain elevated for some time.
DigitalOcean expects to generate up to $775 million in total revenue during 2024, so it has barely scratched the surface of its addressable market, which management values at $114 billion today. AI, of course, could significantly increase that opportunity. With a market capitalization of just $3 billion as of this writing, DigitalOcean could deliver substantial upside for investors over the long term.
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 iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
