3 Brilliant AI Stocks Billionaires Are Buying for the 3 Stages of the AI ​​Boom

A recent report by UBS Global Wealth Management estimates that AI revenues will reach $1.2 trillion by 2027. Analysts believe that “AI will be the most profound innovation and one of the biggest investment opportunities in human history “.

The report divides the investment opportunity into three layers: (1) the enablement 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.

• Andreas Halvorsen of Viking Global Investors bought 1.3 million shares of Nvidia (NVDA -2.13%).
• Ken Griffin of Citadel Advisors bought 1.1 million shares of Amazon (AMZN -1.67%).
• David Shaw of DE Shaw & Co. bought 689,000 shares of Datadog (DDOG -0.01%).

Here’s what investors should know about these stocks.

1. Nvidia: the activation layer

UBS analysts define the first stage of the artificial intelligence (AI) boom as the enablement layer. It includes semiconductor companies and public clouds that provide infrastructure and platform services needed to develop AI applications. UBS estimates that activation tier revenues will total $516 billion by 2027.

Nvidia fits perfectly into this category. The most obvious reason for its inclusion is its dominance in data center graphics processing units (GPUs). Nvidia accounted for 98% of data center GPU shipments last year and has a 90% market share in AI chips according to Morgan Stanley analyst Joseph Moore. Forrester Research recently wrote: “Without Nvidia GPUs, modern artificial intelligence would not be possible.”

Nvidia also provides software libraries and development tools through its CUDA platform that simplify building GPU-accelerated applications. In addition, the company has also launched a complete AI-as-a-service product called DGX Cloud. It brings together supercomputing infrastructure, pre-trained machine learning models and software that support the development of AI applications in use cases ranging from autonomous robots to recommender systems.

Looking ahead, Nvidia is well-positioned to maintain its leadership position in AI chips despite increasingly tough competition from semiconductor companies such as AMD and Broadcom. To quote Forrester Research, “The company’s innovation, roadmap and vision are clear and have kept it moving at the speed of light compared to other semiconductor makers for AI chips.”

Wall Street expects Nvidia’s earnings to grow 37% annually over the next three years. That consensus makes the current valuation of 57 times earnings seem like a reasonable entry point. These numbers yield a PEG ratio of 1.5, which is a significant reduction from 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 large language models (LLM) and machine learning models that power artificial intelligence applications. UBS estimates that information revenue will total $255 billion in 2027.

Amazon fits perfectly into the first and second categories. Amazon Web Services, the largest public cloud by revenue, provides access to infrastructure and platform services that support the development of AI models and applications. Amazon Bedrock is an example. It is a generative AI development platform that allows companies to fine-tune pre-trained models, including the Titan family of models developed by Amazon.

Additionally, Amazon shoppers spend $443,000 per minute on the marketplace, according to the report Goldman Sachs. This gives the company a deep understanding of consumer tastes and preferences, and its generative AI shopping assistant (Rufus) uses this information to answer questions and make product recommendations. As of September 18th, Rufus is officially available to all US customers.

According to a recent survey of IT executives by Goldman Sachs, about 30 percent of applications run in the public cloud today, but that number is expected to approach 50 percent in three years. As the largest public cloud, Amazon Web Services is uniquely positioned to benefit as demand for AI services grows, simply because it already has the largest customer base and partner ecosystem.

Wall Street expects Amazon’s earnings to grow 22% annually over the next three years, making the current valuation of 45 times earnings seem reasonable. These 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 that app revenue will total $395 billion in 2027.

Datadog falls into this category. The company specializes in observability software. Its platform includes a wide range of products that help companies monitor, troubleshoot and evaluate the performance of critical IT infrastructure and applications. More products depend on AI. For example, 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 allows development and operations teams to query observability data using natural language. It simplifies investigations, streamlines incident management, and accelerates remediation of performance issues. Also, LLM Observability is a monitoring tool designed specifically for the large language models that power generative AI applications.

Research company Gartner recently ranked Datadog as the leading provider of observability platforms for the fourth year in a row. The company also has a strong presence in several individual observability verticals such as log analysis, server monitoring and application performance monitoring. In addition, Forrester Research recognized its leadership in AI for IT operations.

Morgan Stanley analyst Sanjit Singh sees Datadog as one of the best-positioned software companies to monetize generative AI. Wall Street expects the company’s revenue to grow 23% annually through 2026. That makes the current valuation of 17.9 times sales seem like a reasonable entry point for patient investors.