Though artificial intelligence (AI) has been a hot topic among technologists for quite some time, it's only in recent years that semiconductor, software, and cloud capabilities have gotten to the point where companies are now deploying AI on a wider basis.
AI is so powerful because it can help companies on every part of the income statement. It can identify the best leads and better satisfy customers through recommendation engines, helping to boost revenue. AI can also help automate many back office tasks, saving companies on their selling, general, and administrative costs. And perhaps most exciting, AI can also help research and development departments find new solutions or correct flaws in highly technological manufacturing processes, benefiting both research and development as well as costs of goods sold.
February is shaping up to be a crucial month for these three AI leaders across cloud, memory hardware, and software-based analytics. Here's what investors should watch.
Alphabet has two main issues that will heavily affect its earnings and outlook. Its main business of digital advertising saw a nice pickup last year; however, investors might be cautious on digital ads today after rival Facebook (META -0.78%) disappointed in its revenue outlook last week. Facebook management said revenue would decelerate in the "low to mid-single digits" for the first quarter, because of "the maturity of our business, as well as the increasing impact from global privacy regulation and other ad targeting related headwinds."
Keep in mind Facebook still grew revenue a solid 25% last quarter, so it's not a huge deal to see some deceleration. I also don't think Alphabet's Google search engine would be quite as affected by privacy regulation, since customers voluntarily enter information they're searching for. However, investors should keep a watch on Alphabet's forward guidance and any commentary around privacy regulations affecting their core digital advertising business.
In addition, the next big growth driver for Alphabet could be its cloud computing division. Alphabet doesn't disclose cloud revenue separately, as leader Amazon.com (AMZN -0.43%) does, but rather groups it in with its hardware and app store revenue in a category called "Google other." Alphabet has also not disclosed specific cloud growth rates either, as does its other cloud rival, Microsoft (MSFT -0.41%). Nevertheless, management usually gives lots of qualitative commentary on the cloud, and it's been investing heavily in that unit over the past 18 months under new cloud head Thomas Kurian.
Both Microsoft and Amazon reported strong cloud results in their recent earnings reports, so investors should monitor management's cloud commentary to see if Alphabet is falling behind these two leaders, or if a rising tide is lifting all boats.
Another leader in AI, though this time on the hardware side, is Micron Technology (MU -1.06%). Micron is a leader in both DRAM memory, NAND flash, and a new kind of memory component called 3D Xpoint, which is just being commercialized now.
Micron doesn't report earnings this month; it has an off-quarter schedule and doesn't report until late March. However, there are a number of interesting developments going on in the memory market in February. Most exciting, the memory market seems poised to begin a strong up-cycle, and Micron's management called the bottom of the current cycle in late December.
The NAND flash market, where Micron earns about 30% of its revenue, is already in the early stages price increases after a huge crash in average selling prices over the past 18 months. Some analysts have even forecast a 40% rise in NAND flash pricing this year, which would significantly boost revenue and profit for all industry players if true.
Meanwhile, while Micron's core DRAM market is lagging behind the NAND market in its upswing, the DRAM market is also showing signs of improvement. Memory market research firm DrameXchange, a division of Trendforce, recently revised upward its first-quarter forecast for DRAM pricing, from an initial projection of flattish average selling prices to a low-single-digit price increase. That could mean that the oversupply in the DRAM market is adjusting faster than some expected, which could lead to better projected results for 2020.
However, Micron is also very sensitive to macroeconomic conditions, and the recent coronavirus outbreak in China seems to have caused blind selling in all such component stocks -- Micron included. While Micron would definitely be affected by a near-term drop-off in demand, it's not showing up in results just yet. Storage and memory are crucial to AI applications, so long-term investors may wish to give all related stocks a look based on the current fear-induced sell-off.
Finally, big data analytics software company Alteryx (AYX) reports earnings on Feb. 13. Alteryx makes an end-to-end software suite that allows both data scientists and average knowledge workers alike to create, organize, and share predictive analytics models across an enterprise.
Alteryx has been on my radar for a little while, and I'm sorry to say I've missed the stock's ridiculous 35% surge in just the past month. What has investors so bullish? While there wasn't any big news in January, investors may be refocusing on Alteryx's long-term prospects after a bout of profit-taking in late 2019. Management believes Alteryx's total addressable market for data analytics and spreadsheet users combined is around $73 billion, versus Alteryx's trailing-12-month revenue of just $351 million. That leaves a huge amount of white space there for the taking, even if Alteryx shares that pie with competitors such as Tableau, which salesforce.com (CRM) acquired in August.
However, Alteryx hasn't shown much competitive pressure yet. Last quarter's revenue accelerated 65%, beating the prior-year quarter's revenue growth rate of 59%. That accelerating growth put the stock back up near its all-time highs, and it now trades at a quite lofty valuation multiple of 26 times sales. Admittedly, that's pricey, even for the high-growth software-as-service sector.
For the upcoming earnings report, I'll be watching closely to see if the company can beat its forecast for 44%-47% revenue growth. While that would mark a deceleration from last quarter, growth rates are bound to come down as the company's revenue base gets bigger, and high-40s growth is hard to find in many large companies. Alteryx also has positive operating income, somewhat rare for a high-flying software company still investing heavily in growth.
With coronavirus fears hitting all tech stocks, investors should look for any type of pullback, perhaps after earnings, as a potential entry point in this winning AI-related software stock.