The AI market is poised to significantly impact economic productivity and growth, with opportunities for potential long-term winners. However, as with any emerging technology, there will be winners and losers. One effective approach to increase the odds of success is to invest in AI leaders that are profitable and generating substantial free cash flow from operations. Two prominent companies that come to mind in this regard are Nvidia, a leading provider of AI chips, and Alphabet, the parent company of Google. These two companies are known for their substantial investments in AI technology. Considering their current valuations, they appear undervalued relative to their growth potential and could offer remarkable returns over the next decade. Nvidia, for instance, has witnessed a sensational 254% increase in its share price in the past year. Its powerful graphics processing units (GPUs), highly sought after for AI-based applications, have solidified its dominance in the AI chip market. Nvidia not only manufactures GPUs but also provides software, systems, and algorithms, creating a comprehensive platform of services for data scientists and AI researchers. The company's ability to convert a significant portion of its revenue into profit, with a margin of $0. 49 for every dollar earned, highlights its strong financial position. Last quarter alone, Nvidia's free cash flow reached $27 billion on a trailing-12-month basis, providing ample resources for further innovation. Although concerns persist regarding the sustainability of Nvidia's success, which is reflected in its relatively low valuation, its growth story is far from over. The upcoming launch of the new H200 GPU, expected to enhance AI performance, is set to fuel the company's growth. Moreover, Nvidia has garnered growing interest from governments worldwide, looking to invest in AI and develop large language models in their own languages.

This increased demand could extend Nvidia's growth trajectory significantly. Overall, Nvidia possesses the key qualities sought after in an AI investment: exceptional profitability, market dominance, and reasonable valuation considering future prospects. Alphabet, on the other hand, has experienced a 47% increase in its shares over the past year, outperforming the broader S&P 500 index. Its investments in AI for Google Search and its digital advertising business make it an attractive stock to hold. Although there is competition from Microsoft's Bing, Alphabet remains the leader in the digital ad market. While its market share in Google Search has declined in recent years, potentially impacting advertising revenue growth, the stock remains conservatively valued, with a forward P/E ratio of 22, lower than the market average. Yet, Alphabet's strengths in data and AI are often underrated. With billions of users across platforms like YouTube and Google, the company possesses immense user data to enhance its AI models. Additionally, Alphabet has substantial resources at its disposal to continue investing in AI, seen in its billions of dollars worth of investments in servers, data centers, and growing free cash flow, projected to reach $69 billion by 2023. The company plans to further increase spending in 2024 to capitalize on growth opportunities, offering an expanded range of AI applications to individual users, advertisers, developers, governments, and cloud enterprise customers. In terms of cloud computing, AI will play a crucial role in Google Cloud, one of the industry's largest service providers for enterprises. In the fourth quarter, Alphabet's cloud revenue experienced a 26% year-over-year growth, with the segment gradually turning profitable. This development could also benefit the overall stock performance. Given Alphabet's robust financial position, it represents a relatively secure investment option in the AI sector. It is a solid choice that can serve as a core holding in a well-diversified investment portfolio.