One of the keys to sustained long-term growth is how advanced a company's technology is, as well as how forward-thinking its management is. And if both top management and the research and development department are firing on all cylinders, odds are the rest of the organization is, too.
These days, if a company hasn't anticipated the exciting breakthroughs in artificial intelligence (AI), it's likely not one of the smartest tech companies out there. But the following three leaders are currently in pole position in the AI races; moreover, their stocks are still below all-time highs to varying degrees.
While they're well off last October's lows, long-term investors should still buy these genius AI leaders in any growth portfolio.
Microsoft
Cloud and enterprise software leader Microsoft (MSFT 1.82%) hadn't necessarily been thought of as an AI leader in recent years, but its investment in OpenAI changed all that. Last November, OpenAI unveiled ChatGPT, an AI chatbot that can give highly accurate, nuanced answers to natural language prompts. Microsoft subsequently made a large investment in OpenAI in January, its third following initial investments of $1 billion in 2019 and a follow-on in 2021. With its backing of OpenAI, Microsoft has seemingly picked the best horse early in the AI race.
Microsoft stands to benefit not just from OpenAI's success in and of itself, but OpenAI could also improve its entire suite of enterprise software by infusing those products with OpenAI's capabilities. In recent days, Microsoft shareholders got a pleasant boost when the company unveiled its AI-powered CoPilot feature for the Office software suite, priced at $30 per month per user.
Given the massive installed base of the Office suite, even modest adoption could be a big uplift to Microsoft's revenue growth. Last week, Jefferies analyst Brent Thill noted that if only half of Microsoft E3 and E5 Office users choose to adopt CoPilot, it could lead to an additional $20.6 billion in annual revenue. That's a nearly 10% incremental revenue uplift based on Microsoft's $207 billion in revenue over the past year.
In addition to AI "add-ons," OpenAI's capabilities should also drive growth in Azure, Microsoft's cloud platform, as Azure could develop a status as the go-to cloud for advanced AI processing.
Finally, Microsoft has shown a genius capability for making acquisitions, and getting those acquisitions through the regulatory process. Past acquisitions include 2016's LinkedIn purchase, which looks incredibly smart seven years later, and more recent purchases of OpenAI and last year's Nuance Communications, a healthcare-oriented AI software company, which have added to Microsoft's AI capabilities. And despite strong objections from the FTC, it appears as though Microsoft will likely be able to pull off its massive $68.7 billion acquisition of Activision Blizzard following the a recent decision of a federal judge two weeks ago.
Microsoft's ability to make savvy technology investments and acquisitions then leverage those over its massive customer base should keep revenue and profit growth humming along in the years ahead. That makes Microsoft a smart buy today even near all-time highs.
CrowdStrike
Another company that was prescient in harnessing the power of cloud-based AI was cybersecurity firm CrowdStrike (CRWD 2.03%). CrowdStrike was founded in 2011, built from the ground up to use AI algorithms and large data sets to consistently improve its lightweight Falcon protection agent. "While others are just now jumping on the AI bandwagon, we have transformed cybersecurity with an AI-powered cloud business from inception," noted CEO George Kurtz on last quarter's conference call with analysts.
So far, the results have been excellent, as CrowdStrike was able to grow its annualized recurring revenue (ARR) last quarter by 42%, even in a slow quarter for enterprise software spending. Even more impressive, unlike just about every other new-age cloud software company out there, CrowdStrike reached profitability under generally accepted accounting principles (GAAP) last quarter. Sure, there was a slight operating loss, but CrowdStrike is also making tons of interest income on its large cash hoard that totals close to $3 billion.
With a super-strong balance sheet, a high gross margin of 78%, and highly scalable cloud-based model, one can see how CrowdStrike could become a highly profitable company in the future.
Image source: Getty Images.
Generative AI also has the potential to jump-start even more business for CrowdStrike. Recently, CrowdStrike introduced its new ChatBot called Charlotte AI, which management believes can help a Tier 1 cyber analyst function at the level of a Tier 3 analyst.
But while generative AI has the potential to greatly improve how businesses function, it should also unfortunately increase the sophistication of hackers. But that should also benefit CrowdStrike, as more sophisticated attacks should push customers into best-in-class solutions like CrowdStrike's.
The current inflationary and high-rate environment is also pushing enterprises to consolidate vendors. As a current leader, that should additionally benefit CrowdStrike in 2023. On its last earnings report, management noted it closed over 50% more deals involving eight or more of its modules, showing CrowdStrike's success at upselling.
While not a cheap stock with a price-to-sales ratio of 14.5, CrowdStrike's stock is still 50% off its all-time highs. If inflation and interest rates come down, this cybersecurity leader is a buy.
ASML
Finally, semiconductor equipment giant ASML (ASML 2.04%) sold off after its recent earnings report, and is now 25% below all-time highs. The sell-off came on fears the much-anticipated semiconductor recovery may be pushed out further than some had thought.
Still, all leading-edge semiconductors depend on ASML's extreme ultraviolet (EUV) lithography machines, and ASML is the only company that makes them. The technology that goes into EUV machines is incredible, requiring a highly precise laser that pulses 100,000 times per second on a droplet of tin, heating it to a temperature 40 times hotter than the sun, causing the tin to release EUV radiation. That radiation is collected and directed onto a semiconductor wafer with extreme precision via mirrors made by German lens specialist Zeiss.
Not only is an EUV system incredibly complicated to make, having spent 25 years in development, but it also requires parts from a complex supply chain, from Zeiss lenses to Trumpf lasers. That technological know-how and sophisticated supply chain of partners makes ASML's EUV moat nearly impenetrable, even for would-be Chinese copycats.
Moreover, ASML could have a very good end of 2024 or 2025. At that time, its new 3800 EUV machines will be on order, which command a higher price and higher gross margin than the $150 million 3600 EUV machines in the field today. And beyond the 3800, ASML's high-NA EUV machines, set for release in 2025, will be required for the continued scaling of chips toward the end of this decade. Those machines will also be higher-priced and should be higher-margin.
While ASML looks somewhat expensive today at 33 times earnings, it's really not that expensive should it hit its long-term targets for 2025 and 2030 outlined at its Investor Day last November. Based on the midpoint of those target ranges, ASML is trading at 23 times 2025 net income and 13.8 times 2030 net income.
Given that ASML should also keep repurchasing stock and paying a growing dividend along the journey, it's a brilliant company to invest in today.
