2 Artificial Intelligence (AI) Stocks to Buy Before They Soar to $3 Trillion, According to Certain Wall Street Analysts

Shares of Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) have fallen a few percentage points year to date despite a 2% return in the benchmark S&P 500 (SNPINDEX: ^GSPC). But certain Wall Street analysts anticipate substantial gains in those stocks in the next 12 months, as detailed below:

• Ivan Feinseth at Tigress Financial has set Amazon with a target price of $305 per share. That implies 44% upside from its current share price of $212. It also implies a market value of $3.2 trillion.
• Paul Chew at Phillip Securities has set Alphabet with a target price of $250 per share. That implies 45% upside from its current share price of $172. It also implies a market value of $3 trillion.

Here's what investors should know about Amazon and Alphabet.

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Amazon: 44% implied upside

The investment thesis for Amazon centers on its strong position in three growing markets. It runs the most popular online marketplace outside of China, powering nearly 41% of retail e-commerce sales in the United States. Amazon is also the largest retail media company, collecting nearly 77% of domestic-retail ad spending and 40% of global-retail ad spending.

Finally, Amazon Web Services (AWS) is the largest public cloud, holding 29% market share in infrastructure and platform services. With more customers and partners than any other cloud platform, AWS is particularly well positioned to capitalize on growing demand for artificial intelligence (AI) infrastructure. The company has leaned into that opportunity by developing custom chips for training and inference.

Importantly, Amazon is also using AI across its retail business to improve productivity and efficiency. CEO Andy Jassy says the company is developing about 1,000 generative AI tools to make warehouse robots smarter, improve inventory allocation, and optimize delivery routes. Those innovations, coupled with the ongoing restructuring of its logistics network, should improve retail margins in the coming years.

As a caveat, Amazon may struggle with tariffs. Morgan Stanley estimates 60% of sellers on the marketplace have some exposure to China, and Chinese sellers represent an important source of advertising revenue. Nevertheless, Andy Jassy believes its diversified seller base will let the company "weather challenging conditions better than others."

Wall Street expects Amazon's earnings to increase at 10% annually through 2026. That makes the current valuation of 34 times earnings look expensive. But analysts have often missed the mark in the past. Amazon beat the consensus earnings estimate by an average of 21% in the last six quarters. Assuming that trend continues, the current stock price is quite reasonable.

Here's the takeaway: I'm not convinced Amazon stock will return 44% in the next year, but I still think patient investors should own a position, and now is a reasonable time to buy a few shares.

Alphabet: 45% implied upside

The investment thesis for Alphabet centers on large opportunities in digital advertising and cloud services. Namely, Alphabet is the largest ad tech company on the planet, and digital ad spending is forecast to grow at 15% annually through 2030. While Alphabet has been losing market share for years, it still has a profound ability to engage internet users with platforms like Chrome, Google Search, and YouTube.

Also, while internet search is undoubtedly moving toward AI tools like ChatGPT and Perplexity, Alphabet is successfully leaning into that trend. Generative AI overviews in Google Search are driving higher usage and satisfaction. And its generative AI application Gemini was the second-most downloaded AI chatbot behind ChatGPT last year, according to Sensor Tower.

Google is the third-largest public cloud. It accounted for 12% of infrastructure and platform-services spending in the first quarter, up a percentage point from the prior year. Meanwhile, Amazon and Microsoft lost share. Google may continue to outpace its peers due to strength in large language models and AI infrastructure, two categories where Forrester Research has recognized the company as a leader.

Importantly, Alphabet has a third major opportunity in autonomous driving technology. That industry is far less developed than digital advertising and cloud computing, but the global autonomous ride-sharing market could top $2 trillion over the next decade, according to Evercore. Alphabet's Waymo is an early leader. It currently provides 250,000 driverless rides per week across four U.S. cities, up fivefold from last year.

As a caveat, Alphabet faces a possible breakup depending on the outcome of two antitrust lawsuits that have progressed to the remediation phase. A federal judge will propose fixes for its illegal internet search monopoly in August, and another federal judge will rule on its ad tech monopoly at a future date. Most analysts think the probability of a forced breakup is slim, but the odds are not zero.

With that in mind, Wall Street estimates Alphabet's adjusted earnings will increase at 7% annually through 2026. That makes the current valuation of 19 times sales look somewhat expensive. But Alphabet beat the consensus estimate by an average of 14% during the last six quarters. The current valuation would be reasonable if that trend continues.

Here's the takeaway: Alphabet stock could return 45% in the next year if the judges issue favorable rulings in the antitrust cases. But the stock could also decline sharply if either judge orders a breakup. Investors can buy a small position today, but I would wait for more clarity before taking a large stake.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.