"Should we develop nonhuman minds that might eventually outnumber, outsmart, obsolete and replace us? Should we risk loss of control of our civilization?" These questions were asked in a March open letter referring to artificial-intelligence (AI) technology -- an open letter signed by Tesla CEO Elon Musk, Apple co-founder Steve Wozniak, and thousands of more people. Many of the signatories believe that AI poses an existential threat to humanity and they want to do something about it.
"We call on all AI labs to immediately pause for at least 6 months the training of AI systems more powerful than GPT-4." GPT-4 is the conversational AI chatbot developed by OpenAI in partnership with Microsoft that's taken the world by storm.
This article won't explore the potential impact of this letter on the world of AI. I'm more interested in what companies are promising buys regardless of AI's future. If AI technology were to be paused tomorrow, I wouldn't expect Amazon (AMZN -1.65%), Xometry (XMTR 0.18%), or CrowdStrike Holdings (CRWD 0.13%) to skip a beat. Here's why.
1. Amazon
Don't look now, but Amazon stock is actually underperforming the market over the past five years, just a 46% gain compared to a 55% gain for the S&P 500. There are good reasons the stock is coming up short right now. The bulk of its business is in e-commerce, and e-commerce-related expenses have skyrocketed.
Looking at the 10-year chart of Amazon below, there's an amazingly strong correlation between the company's stock price and its operating income. In 2022, its operating income fell 51% year over year to $12.2 billion, largely because of the aforementioned issues with e-commerce costs in North America. For perspective, full-year operating income for just the North America business segment dropped by more than $10 billion from 2021 to 2022.
Operating income for Amazon's North America business segment is poised to rebound in 2023 and beyond regardless of what happens in the world of AI. According to management, its operating profit took a $2.7 billion hit in the fourth quarter of 2022 just from layoffs, property and equipment impairment charges, and changes in liability estimates for self-insurance. Many of these charges should be non-recurring.
Even if Amazon's revenue growth slows to a crawl, merely making improvements to its operating margin should help the stock regain ground. That's a big reason that I believe Amazon stock is undervalued today.
2. Xometry
To be clear, Elon Musk and others aren't necessarily against all forms of AI. The technology exists on a spectrum and many tech companies, if not most, already employ at least some form of AI. And this includes manufacturing marketplace Xometry.
On March 30, Xometry released new product features driven by AI -- the kind that wouldn't be paused under Musk's proposals. The company's technology can now provide buyers with instant quotes for certain custom manufactured items. For buyers, this speed can be an incredible value proposition. Traditionally long lead times in manufacturing can be a source of frustration.
Xometry isn't well known -- it's a marketplace connecting third-party manufacturers with buyers. But its marketplace is fast-growing. Full-year 2022 revenue was up 75% year over year to $381 million. And, importantly, active buyers surpassed 40,000 in 2022, up 45% from the end of 2021. By enhancing the value proposition of its platform with AI upgrades, it could keep gaining adoption for years to come.
If Xometry can continue growing, that would be great for shareholders because it's getting more profitable with scale. The company's gross profit grew 158% year over year in 2022 -- far outpacing revenue growth. And its gross margin in the fourth quarter of 2022 was 37% compared to 31% in the prior-year period.
XMTR Revenue (TTM) data by YCharts
Xometry went public less than two years ago and still has a lot to prove. But it's growing and getting more profitable with scale.
3. CrowdStrike
Cybersecurity is one of the great secular growth trends of our time. And that reality has nothing to do with the rise of AI chatbots. If advancements in AI were paused tomorrow, the cybersecurity market would still be growing by tens of billions of dollars annually. For example, third-party research company Fortune Business Insights believes it will grow from about a $140 billion market in 2021 to a $376 billion market by 2029.
CrowdStrike is a cybersecurity player that investors should take seriously. In the company's latest presentation, it cites third-party data from International Data Corporation (IDC). According to IDC, CrowdStrike grew revenue and market share more than any other endpoint cybersecurity company from July 2021 through the end of June 2022.
CrowdStrike appears to be gaining market share for a simple reason: Its platform has 23 different cybersecurity modules, addressing a wide swath of disparate cybersecurity needs. Over time, its customers keep adding new modules to their subscription packages. At the end of fiscal 2023 (ended Jan. 31), 62% of customers had five or more CrowdStrike modules, up from just 2% of customers in fiscal 2018.
Most of CrowdStrike's customers still have room to add additional modules over time, giving more revenue upside. Moreover, the company is still adding new customers at a rapid pace -- nearly 1,900 net new customers in the most recent quarter alone. And the overall market opportunity is still growing as well, as already mentioned, which points to higher revenue for CrowdStrike long term.
AI may be a hot news topic and one that investors are understandably excited about. But I hope it's clear that CrowdStrike's growth isn't dependent on the adoption of AI -- its development could be paused and CrowdStrike would still have a large growth opportunity. The same is true for Amazon and Xometry.
Therefore, if you're an investor worried that Musk's letter will hit the brakes on AI, then take a look at these three stocks.
