Artificial Intelligence (AI) has undoubtedly been the major investment theme of 2023. Unsurprisingly, the improved investor sentiment will also positively impact several AI stocks. However, investors should only consider AI-powered companies with robust fundamentals and high-quality business models, especially if they are interested in long-term gains.
Here's why Microsoft (MSFT 1.82%) and Snowflake (SNOW 3.69%) fit the bill.
Microsoft
Since the 90s, Microsoft's name has been synonymous with the Windows operating system and Office productivity suite. However, lately, the company has become more famous for its Azure cloud computing platform and partnership with ChatGPT developer OpenAI.
Although the past few quarters saw enterprises increasingly optimizing cloud spending, the trend seems to have started normalizing. Of course, the Microsoft Azure cloud computing business continues to be a major beneficiary of enterprises either shifting their workloads to the cloud or starting new AI-optimized workloads on the cloud.
Microsoft has integrated many OpenAI technologies into Azure to launch the Azure OpenAI service, enabling developers to build advanced AI applications using OpenAI's large language models (LLMs) and Azure's cloud-based AI infrastructure. The Microsoft-OpenAI partnership has also made Azure the exclusive cloud provider for all OpenAI's workloads.
Subsequently, Azure saw revenue soar by 29% year over year in its fiscal 2024's first quarter (ended Sep. 30, 2023), of which three percentage points' growth was attributed to Azure AI services. The company saw improved per-user business and higher graphics processing unit (GPU) capacity and utilization for its Azure AI business in the first quarter.
Lately, Microsoft has also expanded its partnership with Oracle to enable customers to deploy mission-critical Oracle databases on Microsoft Azure data centers. This deal can bring even more customers to Microsoft's cloud platform. Further, the company has introduced two custom silicon chips, Azure Maia 100 and Cobalt 100, designed to power its Azure data centers for training LLMs. This move will help reduce Microsoft's reliance on external chip vendors.
While solid demand for AI services is a major growth catalyst for Azure, Microsoft's personal computing business may also start recovering in line with the wider PC market in 2024. The company made Microsoft 365 Copilot, an AI assistant for its Microsoft 365 product suite, available to all enterprises starting in November.
With 40% of the Fortune 100 companies already using the AI assistant in preview mode, demand for Microsoft 365 Copilot looks to be strong. Priced at $30 per user per month, Microsoft 365 Copilot can also be a major revenue stream for the company in the coming months. These tailwinds make Microsoft a compelling pick in 2024.
Snowflake
Once an on-premise enterprise data warehouse for structured data, Snowflake has transformed itself into a cloud-native data platform. The platform helps organizations consolidate, store, and manage structured and unstructured data and workloads across departments, functions, and applications in the cloud. Snowflake also enables clients to process and share this proprietary data at scale to derive business insights for informed decision-making.
Since the launch of ChatGPT, more and more enterprises have become interested in generative AI technologies. These companies are increasingly building LLMs to power customized generative AI applications. With its highly curated, secure, optimized enterprise data repository, organizations are using Snowflake's data platform to train LLMs on huge amounts of high-quality data.
Snowflake's Data Marketplace, which enables clients to share proprietary data (buy, trade, or provide free access), is also pivotal in helping build more robust AI applications. In fact, 28% of its total customer data was shared in the third quarter of its fiscal 2024 (ended Oct. 31, 2023), up from 22% in the same quarter of the prior year.
The data-sharing activity was even more pronounced among the high-value customers, considering 73% of customers contributing $1 million or more in revenues shared data in the third quarter, up from 67% in the same quarter of the prior year. The data-sharing capability has not only made Snowflake's data platform more useful but also increased the customers' cost of switching to competitors. The data marketplace has also created a strong network effect for the company since it attracts more customers to join the platform, expanding Snowflake's data repository.
Furthermore, instead of resting on its past laurels, Snowflake is further innovating to benefit effectively from the AI opportunity. The company recently introduced a fully managed service, Snowflake Cortex, to allow organizations to analyze data and build AI applications. The company's Document AI helps clients convert unstructured data into semi-structured data, thereby making it capable of analytical processing.
Snowflake expects the target addressable market for cloud data platforms to be worth $248 billion by calendar 2026. With its extensive focus on data management and AI services and an annual run rate of around $2.6 billion, there is still significant future growth potential left for the company.
