Artificial intelligence could be one of the most transformative technologies in history.
Analysts at the Switzerland-based investment bank UBS believe artificial intelligence (AI) will be “the most profound innovation and one of the largest investment opportunities in human history.” But that grandiose phrasing fails to capture how transformative the technology could be.
Demis Hassabis, CEO of DeepMind, estimates humankind could achieve artificial general intelligence (AGI) by 2030, meaning a level of superintelligence that would help scientists “cure most diseases within the next decade or two.” Hassabis also believes AGI could solve problems related to energy production and climate change. And he is not alone in making bold predictions.
Dario Amodei, CEO of AI start-up Anthropic, says the emergence superintelligence could lead to the eradication of most infectious diseases, the elimination of most cancers, and the mitigation of climate change. Amodei also thinks AGI will support a doubling in the human lifespan, and he believes those changes could happen within a decade.
Even if those timelines are overly optimistic, companies that provide AI infrastructure and software services could create substantial wealth for investors in the coming years. Alphabet (GOOGL 0.30%) (GOOG 0.33%) and Datadog (DDOG 1.50%) fit that profile. The stocks over the last five years returned 160% and 305%, respectively, and the AI boom could lead to an even stronger performance over the next five years.
Here’s what investors should know.
1. Alphabet
Alphabet subsidiary Google was recently recognized by Forrester Research as a leader in artificial intelligence (AI) infrastructure solutions and foundational large language models. The company is using its AI expertise to reinforce its leadership in digital advertising, and strengthen its position in cloud infrastructure and platform services (CIPS).
For instance, generative AI overviews are increasing usage and improving satisfaction with Google Search, especially among young adults aged 18 to 24, according to CEO Sundar Pichai. Similarly, the company has debuted AI-driven profit optimization tools for advertisers, as well as generative AI tools that automate media content creation and advertising campaign construction.
Additionally, Google Cloud Platform added over 500 updates last year for its machine learning platform Vertex AI, according to consultancy Gartner. Vertex lets users customize pretrained models like Gemini and build AI applications. Google still trails Amazon and Microsoft by a wide margin in CIPS, but its market share increased by a percentage point over the past year, according to Synergy Research.
Alphabet reported strong financial results in the second quarter. Revenue increased 14% to $84.7 billion due to momentum in the cloud computing segement, and modest growth in the advertising segement. Meanwhile, GAAP net income jumped 31% to $1.89 per diluted share as the company continued to prioritize disciplined cost control.
Looking ahead, Wall Street expects Alphabet’s earnings to increase at 17% annually over the next three years. That consensus estimate makes the current valuation of 23 times earnings look quite reasonable. Patient investors should feel confident buying a small position in this AI stock today.
2. Datadog
Datadog provides observability software that helps businesses monitor, analyze, and fix performance issues across their IT infrastructure and applications. Its portfolio features artificial intelligence features that identify anomalies, surface insights, and automate root cause analysis. Consultancy Gartner has recognized Datadog as a leader in observability software for four consecutive years, and Forrester Research has recognized its leadership in AI for IT operations.
Observability software becomes more important as computing environments grow more complex. So, the proliferation of AI systems should be a major tailwind for Datadog, and it’s leaning into that opportunity with LLM Observability, a performance monitoring product for large language models (LLMs). The company also introduced a natural language interface called Bits AI that leans on generative AI to accelerate incident investigation and response.
Datadog reported strong financial results in the second quarter. Revenue increased 27% to $645 million as its customer base expanded and existing customers spent more money. Meanwhile, non-GAAP net income increased 48% to $0.43 per diluted share. Management also raised its full-year guidance, such that sales are projected to increase 23% in 2024.
Looking ahead, Wall Street expects Datadog’s revenue to increase at 23% annually through 2026. That makes the current valuation of 20 times sales look tolerable, and it represents a discount to the three-year average of 23.7 times sales. To be clear, the stock is not cheap at its current price, but patient investors should still consider buying a few shares. Datadog has a strong position in a software market that will become more critical as AI deployments increase.
Importantly, there is a reasonably good chance the stock will pull back at some point in the future, maybe by more than 20%. Investors should be comfortable with that possibility before purchasing shares today, and they should be willing to buy the dip if such a pullback occurs.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, and Microsoft. The Motley Fool recommends Gartner and 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.
