Investing in artificial intelligence (AI) stocks has picked up steam in the past couple of years. Companies across industries are increasingly opting for advanced AI technologies to generate cost efficiencies and improve productivity and decision-making. Subsequently, many of these companies expect to see an increase in topline revenues and bottom-line earnings in the coming years.

Still, stock investors should be cautious about the euphoria surrounding the AI industry. If they want to benefit materially from this secular trend, they should focus on AI-powered companies with sustainable competitive advantages and robust financials. Two such companies are Advanced Micro Devices (AMD 0.34%) and Nvidia (NVDA 1.46%).

Here’s why market analysts expect these companies to prove exceptional AI stock picks in the long run.

Advanced Micro Devices: Forecasted upside potential of 76%

Chip designer Advanced Micro Devices reported impressive second-quarter data, with revenue and profits topping consensus analyst estimates. The analysts were also pleased with the third-quarter 2024 revenue guidance and the increased full-year revenue outlook for its data center AI chips segment. Melius Research analyst Ben Reitzes set a very bullish $265 target price for AMD stock. The target implies an upside potential of 76% over the next year or so.

Nvidia is the undisputed leader in the data center AI market. AMD is working hard to capture a significant share of this high-margin market with its competitively priced and rapidly expanding AI chip portfolio. The company incorporated high-bandwidth memory capacity in its new Instinct MI300 GPUs, making them well-suited for AI inferencing workloads. AMD reported quarterly MI300 sales that topped $1 billion for the first time in the second quarter. AMD also significantly improved its ROCm software stack to support its hardware, making it easier for clients to train AI models on its platform.

AMD is also gearing up to launch new AI accelerators with higher memory capacity and compute performance such as the MI325X series later in 2024, the MI350 series in 2025, and the MI400 series in 2026. The recent $4.9 billion acquisition of ZT System, a major AI infrastructure provider for hyperscalers, is expected to strengthen the company’s foray into the rapidly expanding AI market. The company also acquired Silo AI, the largest private AI lab in Europe, to get access to top-notch human talent in the AI industry.

Elsewhere, AMD already enjoys a strong presence in the global CPU market. The company is already seeing robust adoption of its fourth-generation EPYC server CPUs from cloud providers and large enterprises. The company also plans to launch fifth-generation EPYC processors in the second half of 2024 AMD accounted for 24.1% unit share and 33.7% of the revenue share of the data center CPU market in the second quarter of 2024.

AMD’s gross margins were 53% in the second quarter, up 340 basis points on a year-over-year basis. The company expects its margins to continue to grow in the coming quarters, in tandem with its increasing share in the AI market.

AMD stock trades at 10.9 times trailing 12-month sales, higher than its five-year average price-to-sales (P/S) ratio of 9.2. However, considering its rapidly expanding presence in the data center and server CPU markets and improving margins, the premium valuation seems justified. The stock may thus prove to be an attractive pick even at current elevated price levels.

Nvidia: Forecasted upside potential of 95%

A darling of the stock market, semiconductor giant Nvidia’s shares have gained 159% so far in 2024. Yet, according to hedge fund manager Eric Jackson of EMJ Capital, the stock can hit $250 per share by the end of 2024, implying an upside potential of 95%. Jackson bases his claims on the fact that (until very recently) Nvidia’s forward price-to-earnings (P/E) ratio was lower than its average forward P/E over the past five years. Over the past five years, Nvidia’s forward P/E topped 50 three times and hovered around 70 two times. Given Nvidia’s forecasted growth potential in 2025 and 2026, investor euphoria is likely to drive valuation levels closer to these peak levels in the coming months.

Although Jackson’s forecast may seem overtly bullish, investor optimism for the company is well justified. Nvidia accounted for 92% of the U.S. data center GPU market in early 2024 and 65% of the global data-center AI chips market in 2023. The company’s full-stack platform approach, which includes a complete ecosystem of AI-optimized hardware chips and software systems, networking solutions, and development frameworks, is strengthening and expanding its reach in AI and high-performance computing markets. Furthermore, strategic partnerships with technology titans such as Meta Platforms, Amazon, and Microsoft are also playing a critical role in driving demand for the company’s advanced chips and networking components in areas such as data centers, healthcare, social media, and autonomous driving.

Nvidia enjoys significant pricing power for its AI chips, enabling the company to report impressive gross margins. The company’s flagship H100 chip currently sells for $25,000 per unit. Nvidia can also charge higher pricing for its next-generation H200 and Blackwell architecture chips, thanks to superior technological capabilities and the ongoing supply crunch. Hence, the company’s profit margins can stay high in the coming quarters.

Considering all these factors, it may prove a smart move to pick up at least a small stake in Nvidia stock now.