It appears that evidently all modern technological innovations undergo a hype cycle of sorts. Probably the most famous is the dot-com bubble of the late Nineties and early 2000s. The Nasdaq greater than doubled from the start of 1997 through the March 2000 zenith. Many think a synthetic intelligence (AI) bubble is forming now; many others disagree. Certainly one of the important thing differences between firms now and people through the dot-com bubble is profitability.
While many tech firms back then had little sales and no profits, dozens of firms within the AI industry today are cash-flow positive, have soaring revenue, or are highly profitable — not only hyped. It is a critical distinction that may help guide your investment strategy. Listed here are two firms that fit this mold.
Micron Technology
If there’s one thing that AI needs, it’s data, and this data needs memory — tons of it. Micron (NASDAQ: MU) is a worldwide leader in providing DRAM (dynamic random access memory) and NAND (flash memory), that are utilized in smartphones, PCs, memory cards, data centers, etc. After a rough fiscal 2023, Micron is back in a significant way.
In fiscal 2023, Micron battled geopolitical problems that hampered Chinese sales and a market where its products weren’t in demand resulting from oversupply. In other words, lots of its customers were using existing inventory fairly than purchasing more from Micron. Sales fell from $31 billion in fiscal 2022 to $16 billion in fiscal 2023. The industry is cyclical; in 2023, it was down, but now things are looking up.
AI powers two trends that will likely be tailwinds for Micron. First, a whole lot of information centers are coming online every yr, and this trend is anticipated to proceed for a few years. Micron’s management says that its HBM (high-bandwidth memory) sales will reach a whole lot of tens of millions this fiscal yr and “multiple billions” next fiscal yr. Next, AI will increase demand for upgrading PCs and smartphones, and these AI-ready systems would require more memory, a direct profit to Micron.
Micron reported $6.8 billion in revenue within the third quarter of fiscal-year 2024, an 81% increase over the prior yr and a big margin improvement resulting from high demand. Operating income improved yr over yr from a lack of $1.8 billion to a profit of $719 million.
The stock’s valuation is out of whack resulting from its profitability last yr and incremental recovery this yr. This yr’s average analyst earnings-per-share (EPS) expectations are only $1.23, giving Micron a price-to-earnings (P/E) ratio over 100 at the present price; nonetheless, this is not the entire story. As shown below, analysts predict a large EPS jump next yr to $9.48, which might make the P/E only 14.
The low valuation based on fiscal 2025 estimates and significant tailwinds make Micron a solid long-term investment.
CrowdStrike
Cybersecurity is all the time a priority for executives since the costs of breaches, when it comes to direct costs, downtime, recovery, etc., might be immense. Most successful breaches occur through endpoints, so firms clamor for cover from AI-powered protection like CrowdStrike‘s (NASDAQ: CRWD) Falcon platform.
Falcon is entirely cloud-based and modular, so firms can add features as needed. Selling additional modules is a component of CrowdStrike’s land-and-expand sales strategy, which works well. As of Q1 FY25, 65% of shoppers used at the least five modules, and 28% used seven or more.
The demand for endpoint protection drives incredible growth for CrowdStrike’s sales and free money flow, as shown below.
The incredible rise in sales and nearly 32% free-cash-flow margin over the past 12 months show why investors are buying the stock hand over fist. The stock is up 50% thus far in 2024 and 500% over the past five years. Nonetheless, the epic rise has pushed the stock’s price-to-sales (P/S) ratio extremely high.
CrowdStrike’s P/S ratio now stands near 29, higher than fellow high-growth software company Palantir and cybersecurity firms like Palo Alto Networks and Zscaler:
CRWD PS Ratio data by YCharts
Investors needs to be cautious about buying CrowdStrike due to its valuation; nonetheless, the corporate’s results are spectacular, and it has an incredible future.
The bogus intelligence boom is in full swing, and lots of firms are reaping the rewards. Tech investors: Keep Micron and CrowdStrike in your radar.
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Bradley Guichard has positions in CrowdStrike, Micron Technology, and Palo Alto Networks. The Motley Idiot has positions in and recommends CrowdStrike, Palantir Technologies, Palo Alto Networks, and Zscaler. The Motley Idiot has a disclosure policy.
2 Soaring Artificial Intelligence (AI) Stocks That Aren’t Just Hype was originally published by The Motley Idiot