The S&P 500 has been making a run at a new bull market this year, and after pausing for a breather, the rising trajectory continues. The index -- which tracks the performance of 500 of the largest publicly listed companies in the U.S. -- jumped nearly 6% during the week ended Nov. 3, its best performance thus far in 2023.
Yet this year's rally has been remarkably selective. In fact, nearly half the stocks in the index are actually in the red for the year. Most market watchers agree that what's fueling the uneven rally is the fervor surrounding recent advancements in artificial intelligence (AI). It's largely a case of those companies that have exposure to AI and those that don't.
Further muddying the water is the lopsided opportunity to profit from AI, with just a few companies right now positioned to reap most of the benefits -- at least over the short term.
Given that paradigm, investors are looking far and wide for the companies best positioned to rise as the market moves higher. Let's look at two companies whose AI aspirations are likely just getting started.
Image source: Getty Images.
AI stock No. 1: CrowdStrike
Given its cybersecurity pedigree, investors might not immediately think of CrowdStrike (CRWD +0.74%) in terms of its AI potential, but that could be a costly mistake. The company's flagship offering, Falcon, is a cybersecurity platform with AI in its DNA. The cloud-based system provides protection for every facet of computing, including endpoint security, cloud workload, and identity and data protection.
CrowdStrike has evolved from its roots as the market leader in endpoint security to "the industry's most complete AI-powered threat protection." The platform leverages advanced AI and machine learning, analyzing more than 2 trillion events per day, with its cybersecurity capabilities improving with each encounter.
Furthermore, by analyzing behavior patterns, the system can actually help predict the next attack. The platform has a local agent that handles most suspicious activity, but the more complex or problematic issues are forwarded to CrowdStrike's proprietary distributed threat graph, which can detect and stop most new or novel breach attempts -- often within minutes.
CrowdStrike is a leader in the space, but don't take my word for it. The company was selected for the third consecutive year as a leader in endpoint protection by Gartner's Magic Quadrant. Perhaps even more impressive is that CrowdStrike was recognized for achieving one of the highest ratings ever in Gartner's 2023 Peer Insights report, with 98% of customers willing to recommend the company.
NASDAQ: CRWD
Key Data Points
In the second quarter, CrowdStrike grew revenue by 37% year over year to $732 million, while subscription revenue increased 36%. At the same time, annual recurring revenue grew 37% to $2.9 billion, which illustrates the company's ongoing potential. Furthermore, the company announced its second consecutive quarter of GAAP profitability and record non-GAAP income.
The ability to continue its robust growth -- despite macroeconomic headwinds -- is a testament to the value of CrowdStrike's services and the ever-present need for organizations to protect themselves against the next breach or attack.
To be clear, no one is accusing CrowdStrike stock of being cheap, but at 12 times forward sales, it's still near an all-time low and far below its three-year average of 30. Furthermore, since its IPO in mid-2019, CrowdStrike stock is up 232% (as of this writing), far outpacing the 52% gains of the S&P 500. Given its history of outperforming the market, I'd say the stock has earned a hefty premium.
AI stock No. 2: Alphabet
Alphabet (GOOGL 0.75%) (GOOG 0.87%) is another of those rare companies that leveraged industry dominance in one area, helping make it a contender in others. It also stands to reason that the company would start with these areas in its quest to profit from AI.
Google is unrivaled in the area of online search, with 92% of the market. The company has long used AI to increase the relevance of its search results. It isn't surprising, then, that this would be a primary focus of its AI efforts. Earlier this year, Google announced the addition of generative AI capabilities to its flagship search, though the company is taking a measured approach to ensure these tools are ready for prime time.
Alphabet has used Google's search dominance to fuel its industry-leading online advertising, accounting for roughly 30% of global digital ad sales last year, according to data compiled by online industry publication Digiday. Google recently rolled out a number of generative AI features to help digital advertisers create customized text and images to make their marketing campaigns more effective.
Then, there's Google Cloud's position as a Big Three cloud infrastructure provider. This represents potentially the biggest opportunity to profit from AI, by offering a growing list of state-of-the-art AI tools to users of its Google Cloud.
NASDAQ: GOOGL
Key Data Points
Let's not forget that Google also has a portfolio of nine products that boast more than 1 billion users each. These include Search, Android, Chrome, Gmail, Google Drive, Maps, Google Play Store, YouTube, and Photos. Alphabet recently announced that it was integrating AI technology into 25 products and features, with more on the drawing board.
By using its industry leadership in a number of areas as a springboard for its AI aspirations, Alphabet is increasing the likelihood that it will ultimately be a leader in AI. It's also making its existing products and services more useful, ensuring that it will maintain its industry dominance for years to come.
Finally, Alphabet stock is selling for a song. At 23 times forward earnings, it's selling at a discount to the S&P 500, with a price-to-earnings ratio of 24. Given the multiple catalysts to drive Alphabet higher, don't expect this discount to stick around for long.
