Artificial intelligence (AI) has gotten much attention from investors lately, and it's easy to understand why. More uses of the technology are starting to appear in our daily lives. However, many tech companies have been utilizing it in less obvious ways for many years.
Alphabet (GOOG 0.74%), CrowdStrike (CRWD -0.68%), and Snowflake (SNOW 2.53%) are each taking advantage of the power of AI in ways that I think make them great candidates to invest in. And this is an opportune time to add them to your portfolio.
1. Alphabet
Many investors have grown more worried about Alphabet's future since Microsoft announced that it planned to embed the popular ChapGPT technology in its Bing search engine. Furthermore, when Alphabet tried to strike back with an AI event showcasing Bard, its own AI-powered chatbot, Bard made a mistake in one of its answers.
Shares of Alphabet slid by 7% after the event.
But was that sell-off warranted? ChatGPT is known to make numerous errors, so the issue is hardly unique to Bard. Plus, Alphabet's AI strategy goes beyond chatbots. It's developing AI technology to help developers and creators, as well as utilizing AI in its Google Cloud offering.
CEO Sundar Pichai sees Alphabet as an AI-first company, so why did it seem like Alphabet was caught off guard? Until its fourth-quarter conference call, Alphabet had been keeping its AI developments close to its chest. When other companies began to publicly release their AI technology, it was forced to reveal its hand so investors could see some of its progress, even if its product wasn't quite ready. In reality, Alphabet likely has invested more in AI than any other company.
That's what makes it a strong buy here. While other companies may be winning the AI publicity battle, Alphabet has been winning the war for a long time. With the stock trading at about 21 times earnings in the wake of its recent sell-off, it's a top investment in the AI space.
2. CrowdStrike
CrowdStrike is one of the leading providers of cybersecurity. Its software prevents breaches by protecting network endpoints such as cloud workloads, phones, or laptops. It utilizes AI to strengthen its protection rapidly, as the AI powers machine learning (ML) models to analyze trillions of signals weekly. This constant evolution makes CrowdStrike's protection best in class. Today, it has more than 21,000 customers -- up from only 1,200 just six years ago.
But CrowdStrike still has plenty of room for growth. It only counts 258 of the Fortune 500 and 537 of the Global 2000 among its clients, so a major cohort of the largest companies remains to be won.
However, CrowdStrike's business model also lends itself to cross-selling. With more than 20 modules available that add abilities and visibility to its base offering, it can significantly grow its revenue and earnings from existing clients. Just take a look at how those clients' use of its services has been growing.
| Number of Modules Utilized | Percentage of Customer Base | Increase (YOY) |
|---|---|---|
| 5 or more | 60% | 55% |
| 6 or more | 36% | 66% |
| 7 or more | 21% | 81% |
Data source: CrowdStrike. YOY = Year over year.
CrowdStrike is growing revenue at lightning speed. Annual recurring revenue was up 54% year over year to $2.3 billion in its fiscal 2023 third quarter, which ended Oct. 31, 2022. It also converted 30% of revenue into free cash flow in that quarter. The stock trades at about 44 times free cash flow, which is expensive, but its rapid growth will quickly make that valuation look more reasonable.
3. Snowflake
As ever-more massive amounts of data are generated by business systems, it's becoming increasingly difficult to sift through it all to harness its potential. That's where a data cloud company like Snowflake comes in. Snowflake helps its clients store data efficiently, analyze it to derive actionable insights, and set up applications to flow that data into other programs.
So how is Snowflake an AI investment? A key component of AI models is the machine learning aspect. To train an AI correctly requires tons of data to be fed into it, and then the interpretations the model makes must be checked internally to see if they're correct. Those data flows require software like Snowflake's, especially if you want to continuously evolve the AI and keep it up to date.
Snowflake's business has been booming since it went public, and while its revenue growth has slowed, 67% growth is nothing to worry about.
SNOW Revenue (TTM) data by YCharts.
Snowflake is still in a growth-at-all-costs mindset, so profits and free cash flow haven't been optimized yet. Although the stock trades for an expensive 27 times sales, it's still worth looking at as an AI investment. Its massive $248 billion market opportunity and rapid growth pace offset the valuation risk (at least for me).
