Ever since ChatGPT took the world by storm, artificial intelligence (AI) has been on the minds of investors, commentators, and companies. If you follow a lot of tech companies, as I do, you've noticed that they all seem to feature AI prominently in their latest reports. Hey, it's a smart idea. It draws interest and shows that a company is dialed in to new technology.
But let's get real. Some companies, including CrowdStrike (CRWD 2.03%) and Nvidia (NVDA 6.18%), have AI deeply ingrained in their business, while others hang out on the fringes.
Let's look at what sets CrowdStrike and Nvidia apart and how investors can get in on the action.
Is CrowdStrike stock a buy?
School systems, small businesses, massive corporations, and the military have one thing in common: Cybersecurity is critically important, and they're all targets. Cybercriminals become more sophisticated, and security companies must do the same. This is where CrowdStrike's AI-powered Falcon platform separates itself from the pack. Consider these points:
- It's fully cloud-based.
- It's modular so that customers can tailor to their needs.
- It provides real-time protection and mitigation using AI.
- It uses machine learning to grow more sophisticated as it gathers data from prior events.
This is why customers are flocking to the platform.
Image source: CrowdStrike.
On the back of this stunning growth in subscription customers -- and its ability to attract top-notch customers -- CrowdStrike saw its annual recurring revenue (ARR) reach $2.9 billion last quarter, a 37% year-over-year (YOY) increase. Management has a vision of reaching $10 billion in ARR in seven to 10 years, and key performance indicators back this forecast up.
First, CrowdStrike is as good at monetizing existing clients as it is acquiring new ones. The company's dollar-based net retention (DNBR) has been above 120% every quarter since 2019. DBNR measures the average YOY increase in sales to existing customers. Anything over 100% is great, so 120% is stellar.
Next, customers tend to stay with CrowdStrike after signing up. Net retention rates have been over 97% since 2019.
Finally, the cybersecurity market is still in high-growth mode. CrowdStrike estimates that its addressable market will more than double from $100 billion in 2024 to $225 billion in 2028.
So what's the catch? CrowdStrike is a growth stock, meaning it's usually more volatile than the market, doesn't pay a dividend, and is riskier in the short term. The stock trades at 16 times sales. That's not cheap, but it beats popular AI software companies Palantir (NYSE: PLTR), at 18 times sales, and Snowflake (NYSE: SNOW), at 21. Interested investors should also consider dollar-cost averaging to take advantage of dips in the stock price.
AI isn't just a trend for CrowdStrike, whose credentials predate the current hype by years. The company and stock could be long-term winners.
Nvidia
Not only is AI not a fad for Nvidia; it's the company's lifeblood. You probably hear so much about Nvidia that it's tempting to dismiss the stock as too trendy to be a good investment -- I've been guilty of this for sure -- but the numbers speak for themselves. Here's a visual summary of the company's income:
Let's break down a few key elements.
Nvidia makes most of its revenue selling graphics processing units and AI hardware and software to data centers, to the tune of $10.3 billion last quarter. For instance, Nvidia's DGX platform provides the hardware and software needed to handle the massive workloads for generative AI, like ChatGPT, and other AI functions. Total data-center revenue grew an astounding 171% YOY. There's plenty of room for more growth as companies ramp up AI programs in a highly competitive landscape.
Near the bottom left, we can see that automotive revenue was a minor contributor of just $253 million. This area could increase dramatically in the years to come with the advancement of autonomous vehicles. Nvidia believes it will have a $300 billion market here over the long haul, so keep an eye on this number in the future.
The demand for Nvidia's products is so robust that the company can't make them fast enough. That means Nvidia has pricing power, and pricing power means profits are skyrocketing. Near the middle of the previous graphic, you can see the operating revenue of $6.8 billion, giving Nvidia an operating margin of 50%. To see how dominant this is, check out the following chart, which includes other chipmakers and popular tech stocks.
NVDA Operating Margin (Quarterly) data by YCharts
Nvidia's stock is highly valued (of course) and trades 7% off its recent all-time high. However, its long-term prospects are still attractive. Interested investors should consider buying slowly over time to take advantage of dips. The current price-to-earnings (P/E) ratio is over 100; that figure drops to 42 next year and 28 the following year based on current Wall Street estimates. For context, Microsoft currently trades at a P/E of 34. Wall Street has underestimated Nvidia's earnings in the past, so keep an eye out for raised expectations.
There is little doubt that the AI buzz will fade for many companies, but CrowdStrike and Nvidia are here to stay.
