The market for artificial intelligence (AI) is booming, but not all AI shares are worth buying. As with any technological change, there will be winners and losers. Investors can’t go wrong with companies that are profitable and growing their revenues, such as Snowflake (NYSE: SNOW) and Microsoft (NASDAQ: MSFT).
The IDC predicts that spending on generative AI software will grow 73% annually through 2027. Here’s why these two companies are a good investment to buy and hold over the next 20 years.
Snowflake is a rising star on the cloud computing market. Its revenue has grown from just $592 million to $2 billion in the last three years. Snowflake’s data cloud platform enables organizations to work with their data more cost-effectively and is attracting growing interest from customers looking to harness the power of AI technology for business.
One of the biggest hurdles companies face when utilizing AI is access to high-quality data. AI models are only as good as the data used to train them. Snowflake solves this problem with its data marketplace, where customers can buy data from other companies. This feature is growing in popularity, with Snowflake reporting that 28% of its customers share data on the marketplace, up from 22% in the same quarter last year.
The most important reason why Snowflake can deliver great returns to investors is that the company is already generating positive free cash flow. Snowflake has generated $630 million in free cash flow over the last four quarters, which is a healthy margin compared to its $2 billion in revenue. Snowflake has the capital to invest in innovative products that can widen the company’s economic moat.
Snowflake’s Document AI is a promising opportunity. It can answer a user’s questions based on data from any document. The time savings this service brings could be groundbreaking, as most of the world’s data is stored in unstructured documents.
Furthermore, the company is still in the early stages of scaling its business. This means that investors can expect the company’s growing margins to boost earnings and free cash flow. Wall Street analysts expect Snowflake to achieve annual earnings growth of 60% over the next few years.
Snowflake has a long track record of revenue growth, and profits are expected to grow even faster. This could lead to wealth-creating returns for investors who can patiently hold the shares for the next 20 years.
Microsoft’s competitive advantage is based on the familiarity that millions of consumers and companies have with software such as Office and Windows.
The company’s lucrative software and cloud businesses are the main drivers of high-margin revenue growth. This resulted in $63bn of free cash flow last year, and Microsoft is investing its cash to fully transform itself into an AI-centric services company that can drive further growth and increase the value of its stock for years to come.
Microsoft has stated that AI is the “foundation” for all the software it develops, and its large customer base means that the company is already in a position to potentially generate billions of dollars in new revenue through subscriptions to new AI services.
The software giant recently expanded the availability of Copilot, a generative AI assistant. Microsoft will charge $20 per month for Copilot Pro for individuals, while business customers will pay $30.
Copilot is part of Microsoft’s strategy to transform Windows into an AI-centric platform, which is already building momentum. In the last year, the number of devices running Windows 11 has doubled. Microsoft is an established software brand that is well positioned to monetise AI software.
Analysts expect Microsoft to grow profits by 14% per year. This growth rate is in line with Microsoft’s previous 10-year record.
The hallmark of a great company is that it continually adapts to technological change. Microsoft has successfully navigated the transition from the PC-centric world to cloud computing, and it seems that artificial intelligence will only make Microsoft more relevant. The stock won’t make you rich overnight, but it is a long-term growth machine that can likely outperform the broader stock market.