Earlier this year, ChatGPT became the fastest-growing consumer application in history when it amassed 100 million users in just two months. Threads by Meta Platforms broke the record shortly after, but ChatGPT still left its mark. Wall Street strategists and C-Suite executives alike are captivated by generative artificial intelligence (AI) and its productivity-boosting potential, and many see the technology as a booming market in the making.
Indeed, Bloomberg says generative AI revenue could grow at 42% annually to reach $1.3 trillion by 2032, adding $280 billion to global software sales in the process. One prudent way to capitalize on that trend is to build a basket of AI growth stocks within a broader portfolio.
Investors looking for inspiration should strongly consider Alphabet (GOOGL 10.22%) (GOOG 9.96%) and Salesforce (CRM 0.42%). Here's why.
1. Alphabet
Alphabet is the largest digital advertiser worldwide as measured by sales, and two aspects of its business have been pivotal in that success. First, the company has a unique ability to source data because it owns six products that serve over 2 billion people, including Google Search, YouTube, and Chrome. Second, Alphabet has decades of artificial intelligence research under its belt, and its ad tech software brings that expertise to bear for marketers.
AI expertise has also been instrumental to its cloud computing business. Google Cloud is still a distant third in the cloud infrastructure and platform services (CIPS) market, trailing Amazon Web Services and Microsoft Azure, but its CIPS market share reached 11% in the second quarter, up from 6% three years ago. Among other strengths, Google Cloud is a recognized leader in AI infrastructure, and Forrester Research says its platform is ideally suited to businesses "looking for top-of-the-line deep learning capabilities in the public cloud."
Alphabet topped expectations across the board with its second-quarter report. On the top line, revenue rose 7% to $74.6 billion as strong momentum in Google Cloud offset sluggish ad sales. On the bottom line, GAAP earnings jumped 19% to $1.44 per diluted share due to continued cost control efforts and stock buybacks.
Alphabet sees generative AI as a powerful growth engine, and it's bringing the technology to its ad tech and cloud products. The company recently added a natural language interface to Google Ads to simplify campaign creation. It also added support for generative AI application development to Google Cloud, including the ability to customize large language models like Pathways Language Model (PaLM). Alphabet also plans to embed generative AI capabilities across its Google Workspace business software, helping users write content in Google Docs, organize data in Google Sheets, and create images in Google Slides.
Looking ahead, Grand View Research says ad tech sales and cloud computing revenue could compound at 14% annually through 2030. Alphabet should be able to match that pace, especially if its generative AI ambitions bear fruit, and that seems plausible given that Morgan Stanley recently ranked Alphabet as one of three companies best positioned to benefit from AI tailwinds.
In any case, its current valuation of 6.2 times sales appears reasonable in the context of its growth opportunities. That's why investors should add a small position in Alphabet (likely no more than 2% of their broader portfolio) to their basket of AI stocks.
2. Salesforce
Salesforce specializes in customer relationship management (CRM), a software category concerned with tracking details on current and prospective clients to make data-driven business decisions. Its platform includes productivity tools for marketing, sales, and service teams, as well as adjacent solutions for data management and analytics.
Salesforce is the gold standard in CRM. It captured 23% market share last year, more than the next four competitors combined. Salesforce also increased its revenue more than any rival, meaning the company is pulling away from that pack. Success like that points to an unparalleled capacity for innovation.
Salesforce reported better-than-expected financial results in the second quarter. Revenue rose 11% to $8.6 billion, and non-GAAP earnings soared 78% to $2.12 per diluted share as the company continued to prioritize cost control.
In June, Salesforce announced an arsenal of new generative AI tools that will bring time-saving automations to its CRM platform. For instance, Sales GPT will draft emails and summarize sales calls. Service GPT will craft personalized responses to customer questions. Marketing GPT will recommend targeting parameters to improve ad campaign performance. And Commerce GPT will tailor product descriptions to individual buyers.
Most of those products will be available later this year, adding momentum to a market opportunity that is already growing swiftly. Grand View Research says CRM sales will increase at 14% annually through 2030, and Salesforce should be in the same ballpark, though revenue could grow more quickly if its generative AI ambitions take flight.
In either case, its current valuation of 6.7 times sales looks reasonable by comparison, especially when the three-year average is 8.1 times sales. Investors should feel comfortable adding a very small position in Salesforce (I'd suggest no more than 1% of their broader portfolio) to their basket of AI stocks.
