The S&P 500 has delivered outstanding returns over the last year and is currently up around 23%. However, the index has returned an average annual return of about 10% going back decades, so if you want to find market-beating stocks, you need to look for companies that can sustain high double-digit growth for several years.
The artificial intelligence (AI) market is a promising field to look for growth stocks. Statista estimates spending on AI technology to increase from $184 billion this year to $826 billion by 2030.
Here are two AI stocks that have crushed the S&P 500 over the last year and can outpace the index through the end of the decade.
1. Palantir Technologies
Shares of Palantir Technologies (NYSE: PLTR) have soared to new highs as the AI software provider reported accelerating growth this year. The company has primarily depended on government deals. However, it's starting to see an increasing number of corporations invest in its software, which could catapult the stock to market-crushing returns over the next six years.
In the second quarter, Palantir reported a robust 27% year-over-year increase in total revenue. The company closed 10 deals worth more than $10 million. These results are impressive, considering the headwinds many software companies are experiencing this year due to tightening enterprise spending.
Companies seem to be prioritizing investment in AI. After using Palantir, these companies are seeing positive returns, such as faster completion of tasks and better price optimization for products, which can help a business boost profit margins.
An important advantage for Palantir is the use of its software engineers as part of the sales process. The engineers work with customers to set up the software and show them ways to get more out of it. This gives Palantir an enormous advantage in driving higher sales from customers.
Palantir's high-margin software business should create outstanding shareholder returns in the coming years. Wall Street analysts are projecting Palantir's annualized earnings to grow 85% over the next five years, which implies a substantial increase in the company's margins. There will be ups and downs, but investors should expect Palantir stock to at least double in value from current share prices by 2030 and outperform the market averages.
2. Nvidia
Nvidia (NASDAQ: NVDA) is estimated to control at least 70% of the AI chip market. It has long dominated the market for graphics processing units (GPUs), which have the processing bandwidth to handle the demands of AI training. Nvidia's lead in GPUs has translated to phenomenal returns for shareholders in recent years as companies continue to invest in building more data centers.
Nvidia's data center revenue more than doubled year over year last quarter to $26 billion, and the expanding opportunities beyond the U.S. should allow the company to maintain its momentum into next year. While it prepares to launch the next-generation Blackwell AI computing platform, management also continues to emphasize the burgeoning opportunity to supply AI infrastructure for countries worldwide.
Foreign nations want to use their own language and culture with generative AI tools, and they are turning to Nvidia to help them build the infrastructure to make this happen. For example, Japan's National Institute of Advanced Industrial Science and Technology uses thousands of Nvidia H200 GPUs for its AI Bridging Cloud Infrastructure 3.0 supercomputer.
While Nvidia continues to cash in on the enterprise wave, sovereign AI infrastructure could be the next tidal wave that creates significant growth opportunities for the GPU leader. Management believes its sovereign AI business will surpass $10 billion this year.
Nvidia's share price has soared 160% over the last year, but that has been completely driven by its data center growth. The stock still trades at an attractive forward price-to-earnings ratio of 29 using next year's consensus earnings estimates. With analysts forecasting annualized earnings growth of 52% over the next five years, Nvidia stock could significantly outpace the return of the average stock.
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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
2 AI Stocks That Can Crush the S&P 500 Through 2030 was originally published by The Motley Fool