Artificial intelligence (AI) has triggered an arms race among America's largest technology companies, which are spending billions of dollars on development and also investing heavily in start-ups. Why? Because the estimates for this technology's financial potential are mind-boggling, even at the low end.
Research firm McKinsey & Company predicts AI will add $13 trillion in output to the global economy by 2030, thanks to its ability to make the workforce more productive. Cathie Wood's Ark Investment Management places that figure at a whopping $200 trillion.
While investors are (wisely) betting on trillion-dollar tech giants like Microsoft and Nvidia to profit from AI, there is also an abundance of opportunity at the smaller end of the stock market. Below, I'll examine two AI stocks worth under $5 billion and have plenty of potential.
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1. DigitalOcean: The cloud is at the heart of the AI revolution
Cloud computing is the practice of renting computing power from enormous, centralized data centers managed by tech companies like Microsoft and Amazon. It's a cost-efficient way for businesses to reach their customers and run their operations online without having to maintain their own hardware.
DigitalOcean (DOCN 3.30%) is a specialist provider of cloud services, with a focus on small and midsize businesses, from the start-up phase to those with 500 employees. It offers cheaper pricing compared to larger rivals in the cloud industry, and its platform focuses on simplicity to suit small businesses that don't have dedicated technical teams.
Since the cloud is where companies store their valuable data and access their online applications, it's also where AI is developed, trained, and deployed. Again, it's more cost effective to rent AI computing power from a centralized data center than it would be for a business to build its own infrastructure. That's why DigitalOcean acquired AI cloud provider PaperSpace back in July, and the two companies are a perfect fit.
Like DigitalOcean, PaperSpace offers cheap pricing by billing customers on a per-second basis, so they never pay for capacity they haven't used. Plus, because it's a niche provider, its cost structure is streamlined, meaning it can charge prices up to 70% lower than competing AI cloud platforms like Microsoft Azure.
PaperSpace offers a range of graphics chip (GPU) clusters from leading providers like Nvidia, so even the smallest start-ups can access similar computing power to some of the best AI developers in the industry.
DigitalOcean has around 616,000 customers, and given that PaperSpace serves over 500,000, there's a major opportunity for DigitalOcean to offer both cohorts an expanded suite of cloud-based services. The synergies could be incredibly lucrative over the long term, which could supercharge the revenue of the combined company.
DigitalOcean's revenue grew by 27% in the second quarter of 2023 (ended June 30), which was faster than Microsoft Azure (26%) and Amazon Web Services (12%) in the same period. While DigitalOcean is much smaller than both of them, a faster growth rate implies it's gaining market share, and that phenomenon could accelerate as the integration with PaperSpace continues.
Given the long-term financial estimates for AI are in the trillions of dollars, DigitalOcean stock might have incredible upside potential considering the company is valued at just $2.1 billion today.
2. SentinelOne: Cybersecurity will be critical in an AI-driven world
As I touched on earlier, businesses now rely on the cloud to run their operations online. That means their valuable digital assets are exposed to cyberattacks around the clock, and they can originate from anywhere in the world. Plus, bad actors are growing more sophisticated, and cybersecurity provider SentinelOne (S 1.70%) says they're even using AI and automation to execute larger attacks than ever.
To fight fire with fire, cybersecurity companies are also using AI to automate protection and incident response, but there are still gaping holes in most organizations. A report by Palo Alto Networks suggests 93% of security operations centers still rely on human-led processes, and security operations managers are suffering under massive workloads, with 23% of cyber alerts going entirely uninvestigated.
When used correctly, AI can be an excellent solution to that problem. SentinelOne relies on the technology across the security stack, protecting the cloud, the end point (devices), and even employee identities. But it recently released a generative AI tool called Purple AI, which serves as a chatbot (like ChatGPT) for security operations managers to lean on to lighten their workloads.
Purple AI can reduce alert fatigue by automatically compiling incident reports so managers don't have to spend hours manually digging into the problem. Plus, the chatbot can be prompted at any time to scan an organization's entire network for signs of a specific threat -- it's like a hyperintelligent security assistant.
As of the fiscal 2024 second quarter (ended July 31), SentinelOne was serving over 11,000 customers, which was a 30% increase year over year. But 994 of those customers were spending a minimum of $100,000 per year on the company's cybersecurity platform, which was a 37% jump. Both numbers highlight a growing appetite among organizations to lean on AI-based protection as cyberthreats increase in sophistication.
Like DigitalOcean, SentinelOne is a small player in its industry, with a valuation of just $4.8 billion. Competitors like CrowdStrike and Palo Alto Networks are valued at $44 billion and $80 billion, respectively. But SentinelOne grew its revenue by 46% in the recent quarter, which was faster than CrowdStrike (37%) and Palo Alto (26%), implying it's taking market share.
Aside from McKinsey's long-term AI outlook, the researcher thinks cyberattacks will cause a whopping $10.5 trillion in damage per year by 2025. If there was ever an industry with room for multiple players, it's cybersecurity, and SentinelOne is making the right moves to ensure it will be a leading AI-driven provider in the future.
