If you're looking for stocks that can jump-start your financial goals, identifying companies that are serving a big need in the economy is a great place to start.
There's a good reason why the tech-heavy Nasdaq Composite has returned 75% over the last five years, beating the 32% return of the blue chip-focused Dow Jones Industrial Average. The Nasdaq is full of forward-thinking companies that are investing in innovative technologies.
That said, here's why Advanced Micro Devices (AMD 2.37%) and Monday.com (MNDY 2.81%) are two innovative leaders to bank on for the long term.
1. Advanced Micro Devices
AMD is one of the leading suppliers of central processing units (CPUs) and graphics processing units (GPUs) used in personal computers, cloud data servers, supercomputers, and video game consoles. The stock delivered a phenomenal return of 282% over the last five years, but growing demand for AI chips could push AMD stock even higher over the next five years.
Investors only need to look at rival Nvidia's latest earnings results to see the opportunity for AMD. Nvidia's revenue jumped 88% over the previous quarter, as data centers scramble to invest in high-powered chips to train large language models for generative AI and other advanced applications to come.
AMD is not growing as fast as Nvidia, which leaves the stock trading at a big discount. AMD's price-to-sales ratio of 7.9 is much lower than Nvidia's 35. AMD's revenue was down 18% year over year in the second quarter and flat over the first quarter. AMD's lower valuation appears justified under the current circumstances.
But picking the right stocks is about looking forward, not backward. AMD is not growing as fast because it is currently absent in the artificial intelligence (AI) market, but not for long. It is set to launch the MI300 accelerators, designed for AI workloads, in the fourth quarter.
AMD should grab at least a small share of the AI chip market, which is currently dominated by Nvidia. One reason is that the demand for AI accelerators is pushing the capabilities of Nvidia's supply chain. This is a big opportunity for a second supplier like AMD to enter the market and strike while the iron is hot.
Another reason to expect AMD to do well is that, unlike Nvidia, it also supplies CPUs, which data centers are also using for AI processing. At a recent Goldman Sachs investor conference, AMD CEO Lisa Su said, "AI demand is definitely there, and what it's driving is both CPU as well as GPU demand for us." She sees positive demand trends taking shape for the MI250 and early shipments of MI300.
Given this opportunity, I would consider buying AMD stock now before the market catches on. The stock recently pulled back but could be setting up for new highs in 2024 and beyond.
2. Monday.com
Monday.com is a fast-growing business that helps organizations manage workflows, software development, and team collaboration through its Work OS platform. The stock nosedived in 2022, along with the market sell-off, but it's up 42% so far in 2023 and could be setting up for a monster run over the next decade.
Business spending budgets have been under the microscope lately, but this makes Monday's robust growth more impressive. The company reported a revenue increase of 42% year over year in the second quarter. But some analysts might be concerned about slowing growth, which came in below the 50% increase reported in the first quarter.
Another near-term headwind is a weaker dollar net retention rate, which measures the amount customers are spending on the company's services compared to a year ago. Anything above 100% indicates growing spending from existing customers, but Monday reported a retention rate of 110%, which was down from the previous quarter's 115%.
The most important thing is that long-term demand for Monday's platform is still positive. The company launched a new infrastructure for its platform that increases speed and scalability for more complicated team projects, which should continue to boost interest from prospective customers.
It's also a major plus that Monday is starting to report booming free cash flow, which reached $128 million on a trailing 12-month basis. This is much better than the negative free cash flow from a year ago. More cash resources should fuel more innovation to drive demand.
On that note, Monday recently launched a new AI assistant to automate email writing, content creation, and other tasks on the platform. As Monday developers make apps using this powerful new tool, it will only make Work OS a more attractive offering for companies looking for a sophisticated, easy-to-use platform to boost employee productivity.
Monday will likely continue to experience revenue growth headwinds in the near term, but looking beyond the immediate challenges in the economy, management sees opportunities to cross-sell additional services to customers, such as its customer relationship management (CRM) offering. This market is dominated by Salesforce but is a growing market expected to reach $157 billion by 2030, according to Fortune Business Insights.
The strong revenue performance in a tough environment speaks volumes about Monday's runway of growth ahead. This is still a relatively small business with a trailing revenue of just $624 million that could be a very rewarding investment over the next decade and beyond.
