Artificial intelligence has the potential to be one of the most transformative technologies in history.
Analysts at Swiss-based investment bank UBS believe that artificial intelligence (AI) will be “the most profound innovation and one of the greatest investment opportunities in human history.” But that hyperbole fails to capture how transformative this technology can be.
Demis Hassabis, CEO of DeepMind, estimates that humanity can achieve artificial general intelligence (AGI) by 2030. This means a level of superintelligence that scientists say will allow us to “cure most diseases within the next 10 to 20 years.” Hassabis also believes AGI can solve problems related to energy production and climate change. And he’s not the only one making bold predictions.
Dario Amodei, CEO of AI startup Anthropic, says the emergence of superintelligence could lead to the eradication of most infectious diseases, the eradication of most cancers, and the mitigation of climate change. There is. Amodei also believes that AGI will support doubling human lifespans, and that these changes could occur within 10 years.
Even if those timelines are overly optimistic, companies that provide AI infrastructure and software services could generate significant wealth for investors in the coming years. Alphabet (GOOGL 0.30%) (GOOG 0.33%) and Datadog (DDOG 1.50%) fit that profile. The stock has returned 160% and 305% over the past five years, respectively, and the AI boom could lead to even stronger performance over the next five years.
Here’s what investors need to know.
1. Alphabet
Alphabet’s Google was recently recognized by Forrester Research as a leader in artificial intelligence (AI) infrastructure solutions and fundamental large-scale language models. The company leverages its AI expertise to strengthen its leadership in digital advertising and strengthen its position in cloud infrastructure and platform services (CIPS).
For example, according to CEO Sundar Pichai, Generated AI Overview has increased usage and satisfaction with Google Search, especially among 18- to 24-year-olds. Similarly, the company debuted AI-driven profit optimization tools for advertisers, as well as generative AI tools that automate media content creation and ad campaign building.
Additionally, Google Cloud Platform added more than 500 updates to its machine learning platform Vertex AI last year, according to consultancy Gartner. Vertex allows users to customize pre-trained models such as Gemini and build AI applications. According to Synergy Research, Google still trails Amazon and Microsoft by a wide margin in CIPS, but its market share has increased by 1 percentage point over the past year.
Alphabet reported strong financial results in the second quarter. Revenue increased 14% to $84.7 billion, driven by momentum in the cloud computing segment and modest growth in the advertising segment. Meanwhile, GAAP net income increased 31% to $1.89 per diluted share as the company continued to prioritize disciplined cost management.
Looking ahead, Wall Street expects Alphabet’s profits to grow 17% annually over the next three years. Based on this consensus estimate, the current valuation of 23x P/E looks quite reasonable. Patient investors should feel confident buying a small position in this AI stock today.
2. Data Dog
Datadog provides observability software that enables enterprises to monitor, analyze, and remediate performance issues across their IT infrastructure and applications. Its portfolio features artificial intelligence capabilities that identify anomalies, surface insights, and automate root cause analysis. Consultancy Gartner has recognized Datadog as a leader in observability software for the fourth year in a row, and Forrester Research has recognized Datadog as a leader in AI for IT operations.
As computing environments become more complex, observability software becomes more important. The proliferation of AI systems should therefore be a major tailwind for Datadog, and the company is capitalizing on the opportunity with LLM Observability, its large-scale language model (LLM) performance monitoring product. The company also introduced a natural language interface called Bits AI that leverages generative AI to accelerate incident investigation and response.
Datadog reported strong financial results in the second quarter. Revenue increased 27% to $645 million as the customer base grew and existing customers spent more. Meanwhile, non-GAAP net income increased 48% to $0.43 per diluted share. Management also raised its full-year outlook, expecting sales to increase 23% in 2024.
Looking ahead, Wall Street expects Datadog’s revenue to grow at 23% annually through 2026. This makes the current valuation of 20x sales seem acceptable, which is a discount compared to the three-year average of 23.7x sales. To be clear, the stock isn’t cheap at its current price, but patient investors should still consider buying a few shares. Datadog has a strong position in the software market, which is growing in importance as AI adoption increases.
Importantly, there is a pretty good chance that the stock price will fall by perhaps 20% or more at some point in the future. Investors should fully understand the potential before buying stocks today, and be willing to buy on the edge if such a pullback occurs.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Trevor Jennewine has a position at Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, and Microsoft. The Motley Fool endorses Gartner and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
