As the technology sector continues its shift to Artificial Intelligence (AI), this is a good time for investors to focus on stocks from this space. Today, we take a look at two major AI solution providers — NVIDIA Corp. (NVDA Quick QuoteNVDA - Free Report) and Intel Corp. (INTC Quick QuoteINTC - Free Report) .

Before diving into the details of these two companies, let’s get an idea about the industry.

AI techniques like machine learning, deep learning and natural language processing (NLP) are rapidly changing our digital lives. AI has many broad definitions, but essentially it refers to the concept of machines and virtual programs that can replicate human mannerisms, such as speech recognition, visual processing and so on.

Massive Growth Potential of the Industry

According to the latest data from the IDC, worldwide spending on AI systems will touch $12.5 billion in 2017, reflecting an increase of nearly 60% from 2016. The IDC is also expecting this global spending to witness a compound annual growth rate (CAGR) of 54.4% through 2020, with total revenues likely to reach $46 billion.

Revenue projections are also bullish. One estimate from research company Tractica puts revenues from AI at $59.8 billion by 2025. If such an optimistic forecast does come true, it would be a quantum leap from the 2016 level of a mere $1.4 billion.

Moreover AI’s increasing application into emerging fields like autonomous vehicles is a key catalyst. Autonomous vehicle can sense the surrounding environment and navigate that space without the involvement of humans. Technology like radar, lidar, GPS and computer vision help these cars accomplish this feat.

According to Boston Consulting Group estimates, the autonomous car market will be worth $42 billion by 2025 and $77 billion by 2035.

These projections paint a rosy picture for NVIDIA and Intel’s growth prospects in the AI space.

Neck and Neck

NVIDIA’s foray into the autonomous vehicles and other automotive electronics space has been driving the stock higher since mid-2015. The company continues to enter into new partnerships based on its DRIVE PX AI platform.

NVIDIA also recently unveiled a new AI supercomputer chip designed for self-driving cars called Pegasus at its GPU Technology Conference in Europe. This new technology helps to drive fully autonomous robotaxis which can handle the concept of Level 5 self-driving vehicles and uses NVIDIA’s DRIVE PX 2 platform, trained on deep neural networks. Per the company, the new system is capable of delivering 320 trillion operations per second of performance, which is more than 10 times faster than its predecessor.

Demand for NVIDIA’s HGX AI supercomputer also remains high as more organizations are keen on building AI-enabled applications. The company stated that Huawei, Inspur and Lenovo will be using its Volta HGX architecture to build AI systems for datacenters.

During the fiscal third quarter, NVIDIA launched TensorRT programmable inference acceleration platform, thereby improving the performance and reducing the cost of AI inferencing. Notably, more than 1,200 companies are already using this inference platform, including Amazon, Microsoft, Facebook , Google, Alibaba (BABA Quick QuoteBABA - Free Report) , Baidu, Hi Vision and Tencent.

We expect these factors to help the company sustain their strong momentum

Coming to Intel, the company closed the acquisition of Israel-based Mobileye, an autonomous vehicle technology provider, during the third quarter. The deal will help the company penetrate the $70 billion autonomous driving systems, data and services market.

In 2017, Mobileye won 14 Advanced Driver Assistance Systems designs across 14 automakers compared with 12 wins in 2016.

The company has been a supplier to Alphabet’s Waymo self-driving car unit, which it revealed during the quarter. Intel also formed Automotive Edge Computing Consortium in the quarter.

Notably, Microsoft is deploying Intel FPGAs to develop the industry's fastest public cloud network and accelerate deep neural networks. The company announced that it would use Intel’s 14-nm Stratix 10 FPGAs for its accelerated deep-learning platform (Project Brainwave).

Chinese e-commerce giant, Alibaba also selected Intel FPGA’s in its Cloud. Moreover, Audi is using Intel’s Cyclone V SoC FPGA technology for the Level 3 autonomous driving system in its upcoming A8.

Intel also launched Movidius Myriad X, the world's first vision processing unit with a dedicated neural compute engine to deliver AI capabilities to the edge in a low-power, high-performance package. The company also delivered a 17-qubit superconducting test chip for quantum computing to its research partner, QuTech in the quarter.

Intel is set to launch Nervana neural network processor. The company has worked with Facebook to launch this new AI hardware.

Giving tough competition to NVIDIA, Intel recently announced the appointment of Raja Koduri. The former top graphics architect at AMD will take on the role of “chief architect and senior vice president of the newly formed Core and Visual Computing Group and general manager of a new initiative to drive edge computing solutions,” according to an Intel press release.

NVIDIA or Intel?

Notably, both Intel and NVIDIA sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Now let’s take a look at some key metrics for both of these stocks:

Stock Performance and Valuation

NVIDIA remains one of the best performers in the semiconductor space. The stock has been clocking solid returns over the past year and has soared 126.7%, outperforming the industry's gain of 53.1% in the same period.

However, Intel has failed to keep up pace. Intel’s stock has returned 30.9% in a year, substantially underperforming the 53.1% rally of the industry.

Many would argue that NVIDIA with its hefty forward P/E valuation of 50.9x compared with the industry average of 29.7x is a risky bet. Intel, on the other hand, looks much attractive in this aspect with a forward P/E valuation of 14.1x compared with the industry average of 29.7x.

NVIDIA has surpassed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 33.5%. Intel has also surpassed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 9.7%.

Conclusion

These stocks have grabbed the spotlight with striking performance and strong growth projections. Also, NVIDIA and Intel are two of the hottest stocks in the S&P 500 and there’s a very good chance they will continue performing well in 2018.

We believe that in the long term, both of these companies stand to benefit from their dominant positions in the AI space. The final tally reveals a tie.

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