Nvidia has been one of the best-performing stocks in recent years. The company has a market cap of over $3 trillion. It is still a great option for many, but its historic run has forced many investors to look elsewhere for artificial intelligence (AI) stocks.
If you missed out on Nvidia, there's one other business you should consider. Billionaires have been buying its shares for decades.
Buy the company between Nvidia and its user base
When investing in AI stocks, it's important to understand what makes a company like Nvidia so exceptional. It acts as a crucial supplier to AI companies. Its graphics processing units (GPUs) -- specialized processors that make developing and running modern AI applications possible -- are widely considered as the best in the industry.
Management bet big on its AI GPUs many years ago, so when the current adoption craze arrived, it was better prepared than the competition. This early edge gave it the funds and reputation to out-invest the competition, maintaining a lead that continues to this day.
The takeaway: When investing in AI stocks, sometimes it's best to focus on companies that provide crucial services for the technology. Without Nvidia, AI wouldn't function as well as it does today.
There's a reason why AI businesses pay a big premium for Nvidia's chips versus the competition's. They enable the technology to go from the idea stage to reality. But there's another company that sits between Nvidia and its customers, a well-known business that also makes modern AI applications possible: Microsoft (MSFT 2.71%).
Microsoft has become a leading AI company
Microsoft has been a big tech company for decades. Throughout that time, countless billionaires bought and sold the stock. Bill Gates, one of its founders, still owns a multibillion-dollar stake in the business. But while previous investments were likely based on the company's dominant positioning in the PC market, today the focus is AI.
From an internal perspective, Microsoft is a leading developer and consumer of AI technologies. Its AI Research division is one of the best-funded of its kind in all of tech.
And its partnership with OpenAI, the creator of BitGPT, gives it a clear advantage in accessing and monetizing large-scale AI models. Microsoft implemented these technologies in many of its products, including its Microsoft 365 software suite and its Bing search engine.
Perhaps most importantly, however, is Microsoft's dominant position in cloud computing. In order to function, AI applications rely heavily on cloud computing -- that is, on-demand, distributed, and scalable computing infrastructure.
Just three companies control more than 60% of the cloud computing market. Microsoft comes in second with a 20% global market share, trailing only Amazon. This puts it at the center of the AI revolution, a position it can use to further strengthen its competitive advantages over time.
John Dinsdale, chief analyst at Synergy Research Group, said, "New AI-oriented services and technology are helping the major cloud providers to ride a wave -- new capabilities lead to increased demand, which leads to increased revenues, which then enables more investment in underlying technologies."
While many AI investors are focused on the next big thing, the underlying reality that made Nvidia such a success was that it supplied the industry with components it required to function. Microsoft is in a similar position, allowing it to ride AI spending tailwinds for years to come -- if not decades.
