2 AI stocks to invest $1,000 in and hold for the long term

If AI is here to stay, investors should consider adding these stocks to their portfolio.

The AI revolution has two main components: hardware, which involves data centers packed with advanced semiconductors for training AI models, and software, which includes applications like OpenAI's ChatGPT and a growing range of cloud services for businesses developing their own AI solutions.

Most Wall Street predictions indicate that AI could contribute trillions to the global economy over the next decade. If these forecasts hold true, investors could gain by owning both hardware and software stocks within the sector.

Here’s why those with $1,000 to invest might consider dividing it evenly between chip leader Micron Technology (MU) and cloud services provider DigitalOcean (DOCN).

1. Micron technology: A key player in the AI chip market

When discussing AI chips, Nvidia often comes to mind first. However, Micron plays a crucial role by producing memory and storage chips that are essential in the AI landscape. Notably, Nvidia is one of Micron's customers.

Micron is renowned for its high-bandwidth memory designed for data centers, which enables GPUs to process data swiftly by keeping it readily accessible—akin to the GPU's short-term memory. Its latest HBM3E architecture outperforms earlier memory generations while taking up less physical space and using 30% less energy than competitors, leading to significant cost savings for data center operators.

Nvidia utilizes Micron's HBM3E in its new H200 GPU, which can perform AI inference tasks at double the speed of the flagship H100 while consuming half the energy. The demand for Micron's high-bandwidth memory is so strong that it is sold out for 2024 and 2025, giving the company substantial pricing power and paving the way for accelerated revenue and earnings growth in the coming years.

AI is also expanding into personal computers and devices. Next-gen AI smartphones require nearly double the memory bandwidth of their predecessors, resulting in increased revenue for Micron. Currently, every major manufacturer of Android AI smartphones, including Samsung, is using Micron's LPDDR5X memory chip, which supports up to 16 gigabytes of capacity.

In the most recent fiscal third quarter of 2024 (ending May 30), Micron reported $6.8 billion in revenue, reflecting an impressive 81% year-over-year increase. The compute and networking (data center) segment grew by 85%, while the mobile segment surged by 94%, driven largely by AI demand, which is expected to continue rising.

Micron's fiscal year 2024 ends on August 31, but its final results may be affected by a weak start to the year due to inventory challenges. Nevertheless, analysts forecast earnings of $9.54 per share for fiscal 2025, resulting in a forward price-to-earnings (P/E) ratio of just 14.

In contrast, the iShares Semiconductor ETF, which includes leading chip stocks, currently has a P/E ratio of 39.1. This suggests Micron's stock would need to increase by 179% over the next year to align with its industry peers. However, if AI adoption continues to rise, Micron's stock could perform even better in the long run.

2. DigitalOcean: A cloud provider for small to mid-sized businesses

While major tech giants like Amazon and Microsoft dominate the cloud computing landscape with extensive services for large organizations, DigitalOcean focuses on small and mid-sized businesses, catering to startups and companies with up to 500 employees.

DigitalOcean stands out with its affordable and transparent pricing, personalized support, and user-friendly platform, designed for small businesses lacking in-house tech teams. The company maintains low costs by offering a limited range of services, including basic data storage, web hosting, and software development tools.

Recently, DigitalOcean acquired Paperspace for $111 million to enhance AI accessibility for its budget-conscious clients. Paperspace specializes in managing data centers for AI development, featuring GPU options led by Nvidia's H100. Its pricing can be 70% lower than comparable services on Microsoft Azure, thanks to its focused service offerings and efficient cost structure. Additionally, Paperspace operates without customer contracts, allowing pay-as-you-go options.

This acquisition is expected to create significant synergies in the long run. Estimates indicate that over three-quarters of businesses are currently using or testing AI, meaning most of DigitalOcean's clients could eventually leverage Paperspace's services, leading to increased revenue with minimal additional costs.

DigitalOcean's CEO, Paddy Srinivasan, reported that the company’s annual recurring revenue from AI services skyrocketed at an annualized rate of 128% from December 2023 to March 2024. He noted that demand for AI GPU capacity would likely exceed supply for the foreseeable future, sustaining high growth rates.

The company anticipates generating up to $775 million in total revenue for 2024, indicating it has just begun to tap into its $114 billion addressable market. The rise of AI could significantly expand this opportunity. With a market capitalization of only $3 billion, DigitalOcean presents considerable long-term upside potential for investors.

Is now the right time to invest $1,000 in Micron Technology?

Before purchasing stock in Micron Technology, keep this in mind:

The Motley Fool Stock Advisor team has identified their top 10 stock picks for investors right now, and Micron Technology is not on that list. The chosen stocks are expected to deliver significant returns in the coming years.

For example, when Nvidia was recommended on April 15, 2005, an investment of $1,000 would have grown to $787,026!

This highlights the substantial rewards for Stock Advisor members who bought and held onto their recommendations. Don’t miss out on their latest top 10 list!