3 actions to take advantage of the next wave of investment in artificial intelligence (AI).

Nvidia was the king of the first wave of investment in artificial intelligence (AI). Its graphics processing units (GPUs) are purchased by the largest cloud computing and AI modeling companies. Ultimately, if they have all the computing power they want, Nvidia’s business would decline because no new computing capacity would be needed.

This will give way to the next wave of investment in AI, and if you want to take advantage of this trend, I have three companies that are set to do well.

Cloud computing will grow enormously

The next wave will benefit companies that train and develop AI models or those that provide cloud computing services to companies that develop AI. The main cloud computing players are Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT)and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). As industry leaders, they have been some of the biggest buyers of Nvidia GPUs in recent quarters.

All three also have affiliations with generative AI models, with Amazon and Microsoft investing in and partnering with Anthropic and Open AI, respectively. Alphabet is developing its generative AI model, Gemini, in-house. Given that all three companies have strong ties to leading generative AI models, they are well positioned to provide users with the tools they need to create AI models.

However, having a generative AI model for cloud computing customers is just table stakes for a much bigger game. Many workloads are still processed on-site at companies around the world. While some of these workloads may never migrate to the cloud, the vast majority will. That’s why the cloud computing market opportunity is expected to grow from $676 billion in 2024 to $2.3 trillion by 2032, according to Fortune Business Insights.

Because it’s easy to scale up or down the computing power you rent in the cloud, it’s ideal for training in-house AI models because companies don’t have to permanently buy expensive computing power from companies like Nvidia. With the general trend towards the cloud being accelerated by the demand for AI, it’s clear that this will be a huge investment trend.

But does that make all three stocks buys?

All three stocks have unique price points

The problem with each of these companies is that cloud computing isn’t the only thing they do. While cloud computing continues to be one of the best (if not the best) performing segments in each of these businesses, other core businesses are driving the stocks. In addition, the prices you have to pay for inventory vary widely.

The story continues

Amazon is the most expensive, but that’s because it has the most potential in cloud computing. Amazon Web Services (AWS) is the market leader in cloud computing. But because Amazon’s ancillary businesses are all fairly low-margin, AWS accounts for 64% of its operating profit, despite contributing just 18% of revenue. This means that if AWS sees rapid growth, Amazon’s profits will rise quickly, quickly driving down Amazon’s expensive valuation.

Although Amazon is technically more expensive from a forward price-to-earnings (P/E) ratio, I would argue that Microsoft is the most expensive. His business has steadily grown revenue, but his profit margins have remained relatively flat. As a result, there’s really no big advantage for Microsoft; they have to maintain their status quo to keep their premium price.

Last is Alphabet, which is actually cheaper than the broader market (as measured by S&P 500, which trades at 22.7 times forward earnings). Alphabet doesn’t have the premium valuation of its peers because it has lagged several key product launches, but that doesn’t mean it can’t be a solid investment. Alphabet has a lot to gain from its cloud computing wing, as it’s just starting to become profitable, and it could be a huge boost to profits as it moves toward AWS-like margins.

All three cloud computing businesses have merit, but Amazon and Alphabet stand out as better investment options than Microsoft right now based solely on their potential to grow profits.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

3 Actions to Take Advantage of the Next Wave of Artificial Intelligence (AI) Investments was originally published by The Motley Fool