Artificial intelligence (AI) and machine learning (ML) are more than just buzzworthy terms for some cutting-edge companies. They are the foundations on which incredible businesses have been built. Even better, some of these companies make hay in industries essential to the economy.
Cybersecurity is top of mind for C-suite executives in all industries, government agencies, school districts, and even nonprofits. Cybercriminals are always on the prowl, costing organizations billions each year. IBM notes that up to 90% of cyberattacks and 70% of breaches come through endpoint devices.
AI-powered CrowdStrike Holdings (CRWD +0.01%) is the leader in endpoint security with a comprehensive, entirely cloud-based platform. The company's results are on fire, as I'll discuss below.
Meanwhile, data centers are crucial for cloud applications, data storage, computing power, and (definitely) complex AI and ML software that require massive computing power. Nvidia (NVDA 1.56%) is light-years ahead of its competition, and its data center software and hardware are mission critical. This is why its data center revenue rose 171% year over year last quarter to $10.32 billion.
CrowdStrike is firing on all cylinders
CrowdStrike provides comprehensive security with its Falcon platform. The advantages are several: Falcon is cloud-native (no on-premises hardware required), customizable, and uses AI to analyze data and provide real-time protection.
The platform is modular, so customers can choose which modules they want or need. This plays into CrowdStrike's land-and-expand strategy: It gains a customer, proves the platform's worth, and then the customer adds more modules -- creating more revenue.
This shows up in the company's dollar-based net retention rate (DBNR), which has been above 120% dating back to the first quarter of fiscal 2019. DBNR measures the year-over-year increase in sales from an average customer. Above 100% is good, and above 120% is excellent.
You can probably guess how the chart of annual recurring revenue (ARR) growth looks:
Source: CrowdStrike.
The meteoric rise to $2.9 billion in ARR has enabled CrowdStrike to generate $416 million in free cash flow through the second quarter of this 2024 fiscal year and stack up $3.2 billion in cash against $742 million in long-term debt. Having cash on hand to fund growth is crucial in this environment, and the company likely won't have to borrow money at unfavorable interest rates.
CrowdStrike has a market cap near $50 billion, about 16 times Wall Street estimates for sales this fiscal year (which ends Jan. 31, 2024), and 13 times Wall Street estimates for the next fiscal year. That's not necessarily cheap (great companies usually aren't), but it is less than other growth companies like Snowflake and Palantir Technologies. In short, it's a great company, but consider dollar-cost averaging to take advantage of dips in the stock price along the way.
Will Nvidia crush expectations again?
Nvidia is top of mind as investors await Tuesday's 2024 third-quarter earnings report. The stock is near another all-time high after a brief pullback recently. It has risen 237% so far in 2023 for a simple reason: Business is absolutely booming.
At the top, I mentioned the rise in data center sales, and this demand gives it pricing power in the industry. So profits and margins are soaring alongside revenue, as shown below.
NVDA operating income (quarterly) data by YCharts.
The company more than doubled operating revenue from the first quarter to the second this year, and its 50% margin is spectacular. Unfortunately, the secret is out, and the stock isn't cheap. Nvidia needs to continue raising Wall Street's estimate to maintain its valuation.
Nvidia's current price-to-earnings (P/E) ratio is 119, ridiculous on the surface. But the P/E is backward-looking -- it uses earnings that have already happened, while Wall Street is about the future. Based on the market's estimates for next year, the P/E falls to 45, then to 29 the following year. This is nearly identical to Microsoft's current valuation, as shown below.
NVDA PE ratio (forward 1 year) data by YCharts.
This tells me that the stock isn't tremendously expensive; however, Nvidia must push the envelope to give investors more juicy gains.
