The S&P 500 has yielded impressive returns over the past year, currently boasting an increase of approximately 23%. Historically, the index has averaged an annual return of around 10%, so to identify stocks that outperform the market, one must seek companies capable of maintaining substantial double-digit growth over extended periods.
The artificial intelligence (AI) sector presents a fertile ground for discovering growth stocks. According to Statista, expenditures on AI technology are projected to rise significantly, from $184 billion this year to $826 billion by 2030.
Below are two AI stocks that have outperformed the S&P 500 over the past year, with the potential to continue outpacing the index through the end of the decade.
1. Palantir Technologies
Palantir Technologies (1.95%) has seen its stock prices surge to unprecedented levels following reports of accelerated growth this year by the AI software firm. Historically reliant on government contracts, Palantir is now witnessing a growing influx of corporate investments in its software, which could propel the stock to deliver market-beating returns over the next six years.
In the second quarter, Palantir posted a strong 27% increase in total revenue compared to the previous year, closing 10 deals each valued at over $10 million. These results are notable, especially in a year where many software companies face challenges due to reduced enterprise spending.
Businesses appear to be prioritizing AI investments, and those utilizing Palantir’s software are reaping rewards such as quicker task completion and improved pricing strategies, enhancing profit margins.
A key advantage for Palantir is incorporating its software engineers into the sales process. These engineers assist customers in setting up the software and demonstrate how to maximize its benefits, providing Palantir with a significant edge in boosting sales.
Palantir’s high-margin software operations promise impressive returns for shareholders in the coming years. Wall Street analysts anticipate Palantir’s annual earnings will grow by 85% over the next five years, indicating a substantial increase in the company’s margins. Although there may be fluctuations, investors can expect Palantir’s stock to at least double from its current value by 2030, surpassing market averages.
2. Nvidia
Nvidia (-0.03%) is estimated to hold a commanding 70% share of the AI chip market. The company has long been a leader in graphics processing units (GPUs), which possess the processing capacity required for AI training. Nvidia’s dominance in GPUs has resulted in remarkable returns for shareholders in recent years, as businesses continue to invest in expanding data centers.
In the last quarter, Nvidia’s data center revenue more than doubled year over year, reaching $26 billion. The expanding opportunities outside the U.S. are expected to sustain the company’s momentum into the following year. As it gears up to launch the next-generation Blackwell AI computing platform, management is also focusing on the burgeoning opportunity to provide AI infrastructure to countries worldwide.
Nations are keen to integrate their own languages and cultures with generative AI tools, and they are increasingly looking to Nvidia to help build the necessary infrastructure. For instance, Japan’s National Institute of Advanced Industrial Science and Technology employs thousands of Nvidia H200 GPUs for its AI Bridging Cloud Infrastructure 3.0 supercomputer.
While Nvidia continues to benefit from the enterprise wave, sovereign AI infrastructure could present the next major growth opportunity for the GPU leader. Management projects the sovereign AI market will surpass $10 billion this year.
Nvidia’s stock price has surged 160% over the past year, fueled entirely by its growth in data centers. The stock remains attractively valued with a forward price-to-earnings ratio of 29, based on next year’s consensus earnings estimates. With analysts predicting annualized earnings growth of 52% over the next five years, Nvidia’s stock could substantially outperform the average stock return.
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