Recent breakthroughs in artificial intelligence (AI) have worked Wall Street into a frenzy, and Wedbush Securities strategist Dan Ives is particularly bullish. He recently told clients: "We believe the stage is set for a '1995 moment' as AI is the most transformational technology we have seen since the internet started to take shape."
That commentary implies substantial wealth creation. The internet is the foundation of several markets now measured in the hundreds of billions or even trillions of dollars, including cloud computing, digital advertising, and e-commerce. Investment opportunities like that come along but once in a generation, and Ives says AI is the next gold rush.
Here are two AI growth stocks to buy now and hold.
1. CrowdStrike Holdings
CrowdStrike Holdings (CRWD 2.03%) specializes in cybersecurity software. Its Falcon platform comprises 27 modules that span several large markets, and the company is a recognized leader in many of them, including endpoint security, cloud security, and threat intelligence. That success is a product of unique platform architecture, superior artificial intelligence (AI), and workload consolidation.
Specifically, the Falcon platform can be deployed more easily than other products because every module is delivered through a single sensor that can be installed without a system reboot. CrowdStrike also designed its platform to capture data unlike any other solution on the market, and each data point makes its machine learning models a little better at detecting threats.
In other words, the company has a data advantage that hints at superior AI, which itself points to superior threat protection. To quote Sarah Pavlak of consultancy Frost & Sullivan: "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security, as well as providing unparalleled prevention of malware and malware-free attacks."
That selling point is made more persuasive by workload consolidation opportunities. CEO George Kurtz says most enterprises buy over 60 cybersecurity point solutions, but CrowdStrike helps reduce operational complexity by integrating more than two dozen products on one platform.
CrowdStrike delivered a solid financial performance in the second quarter in spite of persistent macroeconomic headwinds. Revenue rose 37% to $732 million, and non-GAAP (adjusted) net income jumped 109% to $180 million. Additionally, CFO Burt Podbere said the company has the best retention rates in the industry, a testament to the value its platform creates for customers.
Looking forward, CrowdStrike has outlined an ambitious product roadmap that could push its addressable market to $158 billion by 2026, up from $76 billion today. Analysts at Morningstar expect revenue growth of 31% annually over the next five years. That makes its current valuation of 16.5 times sales seem fair, especially compared to the three-year average of 31.5 times sales. Investors should feel comfortable buying this growth stock today.
2. UiPath
UiPath (PATH 0.26%) specializes in robotic process automation (RPA) software. RPA is a technology that can automate simple and repetitive tasks, such as extracting information from a structured document. UiPath has also embedded its software with AI capabilities that support more sophisticated automation, such as extracting and acting on information from an unstructured document.
The UiPath platform allows businesses to (1) analyze tasks and processes to identify automation opportunities, (2) build software robots that automate a variety of simple and sophisticated workflows, and (3) manage and optimize those software robots. UiPath is a recognized leader in several relevant markets, including RPA, process mining, task mining, and intelligent document processing.
UiPath reported reasonable financial results in the second quarter. Revenue increased 19% to $287 million, and non-GAAP net income reached $49 million, up from a loss of $11 million in the prior year. Investors can expect similar momentum in the future as UiPath leans into its AI-centric product roadmap.
Autopilot and Clipboard AI are particularly noteworthy innovations. The former is a generative AI assistant that allows customers to automate work with natural language, which makes the UiPath platform more user-friendly. The latter allows customers to intelligently copy and paste data across applications, documents, and spreadsheets, and it was recently recognized by TIME as one of the best inventions of 2023.
UiPath believes its AI-centric product roadmap will push its addressable market from $61 billion today to $93 billion in the future. As that happens, Morgan Stanley sees a spectrum of possible outcomes, with revenue growing between 6% annually (bear case) and 21% annually (bull case) over the next decade. The base case calls for UiPath to grow revenue at 13% annually, and that makes its current valuation of 7.8 times sales appear fair.
UiPath is the riskier of the two investments discussed in this article. Its growth has slowed more sharply in response to macroeconomic headwinds, and automation software is less critical than cybersecurity software. Even so, UiPath shareholders could see a windfall in the future if the company positions itself as the gold standard in AI-powered business automation. So, I think this stock has a place in a broader basket of AI stocks, and now is a good time for risk-tolerant investors to buy a small position.
