Artificial intelligence (AI) promises to be one of the most revolutionary technologies in human history. It is already improving productivity, increasing efficiency, and changing the world in ways we cannot yet imagine. More changes are expected but will take time, and naysayers will call AI overhyped along the way. But some people also called the internet overhyped following the dot-com fiasco.
I am not saying AI is impervious to irrational exuberance, but it still has real potential to create wealth for patient investors. Consider this commentary from Microsoft co-founder Bill Gates: "The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the internet, and the mobile phone."
Opportunities like that come along once in a decade. I believe (like Gates) that this latest round of advancements in AI is the next big opportunity, and the most prudent way for investors to benefit is to build a basket of AI stocks.
Let's look at why two particular stocks, Amazon (AMZN 3.43%) and CrowdStrike Holdings (CRWD 2.03%), belong in that basket.
1. Amazon: A leader in cloud AI developer services
The investment thesis for Amazon is compelling even if artificial intelligence (AI) is excluded from the calculus. The company operates the most visited online marketplace in the world, Amazon is the third-largest ad tech company in the world, and Amazon Web Services (AWS) is the leader in cloud computing, with nearly as much market share as Microsoft Azure and Alphabet's Google Cloud combined.
So what? Retail e-commerce sales are expected to increase at 8% annually through 2030, while the ad tech and cloud computing markets are forecast to expand at roughly 14% annually during the same period. That hints at low-double-digit revenue growth for Amazon through the end of the decade, which makes its current valuation of 2.5 times sales look quite reasonable.
But Amazon could grow more quickly as it leans into AI, a market expected to increase at 37% annually through 2030, and investors have good reason to think the company will be successful. Earlier this year, Gartner recognized AWS as a leader in cloud AI developer services, and Argus analyst Jim Kelleher recently said the company is uniquely positioned in the nascent AI services space given its leadership in the broader cloud computing market.
Amazon CEO Andy Jassy expressed a similar opinion on the latest earnings call: "People want to bring generative AI models to the data, not the other way around. AWS not only has the broadest array of storage, database, analytics, and data management services for customers, it also has more customers and data stores than anybody else."
Building on that, AWS also offers the broadest and deepest portfolio of AI services in the cloud, and the company recently reinforced its offering with Amazon Bedrock. That service, which became generally available in September, allows businesses to customize pre-trained large language models for the purpose of tailoring generative AI applications to specific use cases.
Here's the bottom line: Amazon is already growing at a steady clip -- second-quarter revenue increased 11% to $134 billion and GAAP net income improved to $6.7 billion, up from a loss of $2 billion in the prior year -- and the stock trades at a reasonable valuation given its prospects in e-commerce, ad tech, and cloud computing. But if AI services become a significant revenue stream in their own right, shares may appear materially undervalued in hindsight. Either way, now is a good time to buy this growth stock.
2. CrowdStrike: A leader in AI-powered cybersecurity
Software vendor CrowdStrike offers over two dozen cybersecurity modules that span multiple industry verticals, and the company has earned a leadership position in many of those markets. That includes endpoint security, cloud security, threat intelligence, and managed security services, among other categories. Superior AI is the foundation of that success.
The CrowdStrike Falcon platform was engineered to collect data on a hitherto unheard of scale, and each data point makes its AI models a little better at detecting threats. To quote consultancy Frost & Sullivan: "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security." The report goes on to say CrowdStrike offers unparalleled prevention of malware and (more sophisticated) malware-free attacks.
CrowdStrike reported solid financial results in the second quarter. Revenue climbed 37% to $732 million as new customers deployed the platform and existing customers adopted more modules. In turn, its GAAP gross profit margin expanded 130 basis points to 75%, and non-GAAP net income soared 110% to $180 million. Investors have good reason to believe that momentum will carry into future quarters. Cybercrime is forecast to become increasingly costly in the years ahead, and CrowdStrike is executing on its strong growth strategy.
Most notably, the company introduced its generative AI assistant (Charlotte AI) earlier this year, a natural language interface that allows users to surface insights, automate security workflows, and accelerate threat detection and remediation. Morgan Stanley sees CrowdStrike as one of four cybersecurity vendors best positioned to benefit from generative AI, and analysts anticipate annual revenue growth of 24% over the next two years.
That forecast makes its current valuation of 16.9 times sales look reasonable, especially when the three-year average is 31.6 times sales. That's why risk-tolerant investors should add a small position in CrowdStrike to their basket of AI growth stocks.
