3 Top Artificial Intelligence (AI) Stocks Ready for a Bull Run

The rapid expansion of artificial intelligence (AI) has lit a burning fire under many tech stocks. The biggest winners so far are fundamental companies like Nvidia (NVDA 3.37%) and Microsoft. Nvidia provides high-end GPUs for data centers to process complex AI tasks, while Microsoft has a major stake in ChatGPT’s creator, OpenAI.

Over the past five years, Nvidia’s stock has risen 2,590% as companies scrambled to upgrade their servers with its new GPUs. Microsoft’s stock has more than tripled as it has integrated more of OpenAI’s tools into its growing cloud ecosystem.

Image source: Getty Images.

Both AI stocks are still solid long-term investments, but investors shouldn’t pass up the less obvious AI plays that could rise over the next few years. Let’s take a closer look at three of these companies: Oracle (ORCL -0.51%), Broadcom (AVGO 0.72%)and Arm holds (ARM 0.88%).

1. Oracle

Oracle is one of the largest database software companies in the world. This is a mature market, but it has sparked several new growth engines over the past decade, turning on-premises software into cloud-based services. It also expanded its cloud ecosystem with more enterprise resource planning (ERP) services and strengthened its cloud infrastructure platform.

Oracle is benefiting from the growth of the artificial intelligence market in two ways: its database software brings together a lot of data to be processed by artificial intelligence applications, and its cloud infrastructure platform supports the growing needs for storage and calculation of those demanding applications. The company already generated 42% of its revenue from cloud-based software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) platforms in its most recent quarter. Its IaaS revenue, which already grew 50% in FY2024 with the expansion of the AI ​​market, is expected to accelerate again in FY2025.

From fiscal 2024 to fiscal 2027 (ending May 2027), analysts expect Oracle’s revenue to grow at a compound annual growth rate (CAGR) of 12% as its earnings per share (EPS) growing at a CAGR of 21%. Its stock might not look like a bargain at 31 times next year’s earnings, but the ongoing expansion should support that higher valuation.

2. Broadcom

Broadcom is a diversified semiconductor and infrastructure software giant that has evolved and expanded through large acquisitions. Its semiconductor business makes chips for the mobile, data center, networking, wireless, storage and industrial markets, while its newer infrastructure business has grown rapidly over the past six years with its 2018 acquisition of CA Technologies, the security division of Symantec for enterprises in 2019 and cloud software giant VMware last November.

Broadcom’s sales of networking, optical and custom accelerator chips have grown over the past year as data centers have upgraded their infrastructure to support new AI applications. Its AI chip revenue is expected to triple to $12 billion, or nearly a quarter of its annual revenue, in fiscal 2024 (which ends in October). That growth, along with VMware’s integration and acceleration, should offset its slower non-AI chip sales.

From fiscal 2024 to fiscal 2027, analysts expect Broadcom’s revenue to grow at a CAGR of 24% as its EPS grows at a CAGR of 18%. Its stock might not look cheap at 43 times next year’s earnings, but that valuation is inflated by one-time charges related to its recent acquisitions. On an adjusted basis, it looks more reasonably valued at 27 times forward earnings — and could continue to go higher as its AI business expands.

3. Supporting the arms

Arm is a UK chip designer that was acquired by SoftBank in 2016 and spun off in an IPO last September. Nvidia, which almost acquired Arm before antitrust regulators scrapped the deal, is still one of its biggest investors. Arm designs energy-efficient chips and licenses them to other chip makers such as QualcommMediaTek and Apple. It doesn’t make any chips on its own, but its chip designs are used in about 99% of all premium smartphones today.

Arm is still based in the cyclical smartphone market, but has designed more chips for the automotive, PC and cloud markets. It also launched its new Armv9 models, which are optimized for processing AI tasks in all its markets. These new AI chip designs generate much higher royalties than Arm’s non-AI chip designs.

From fiscal 2024 to fiscal 2027 (ending March 2027), analysts expect Arm’s revenue to grow at a CAGR of 23% as its EPS grows at a CAGR of 88%. Arm stock looks expensive at more than 100 times next year’s earnings, but it could have plenty of room to run as the AI ​​market expands and gradually replaces the x86 chip architecture used by Intel and AMD.