After a difficult 2022, Wall Street managed a roaring recovery in 2023. The benchmark S&P 500 index gained over 24% last year, a rally that seems to continue in early 2024. Much of this rally can be traced back to the strong performance of artificial intelligence (AI)-related stocks in the past few months.
As AI takes on increasing importance in our daily lives, it remains a relevant investment theme for 2024. To benefit from this trend, investors should consider purchasing stakes in high-flying AI stocks such as Microsoft (MSFT 1.82%), Alphabet (GOOG 9.96%) (GOOGL 10.22%), and HubSpot (HUBS -0.78%). Here's why these three unstoppable AI stocks are smart buys now.
1. Microsoft
Widely recognized for its Windows operating system and Office productivity suite, Microsoft is getting more attention these days for its strides in the generative AI space. The company's $13 billion investment in OpenAI, the creators of ChatGPT, played a pivotal role in its ongoing strategy to infuse the majority of its core offerings with advanced AI capabilities.
Microsoft's cloud platform Azure is a major beneficiary of organizations migrating their workloads to the cloud, especially since IT spending optimization trends have stabilized in the past couple of quarters. Plus, Azure's AI services have demonstrated top performance in training and inferencing multiple proprietary and open-source large language models, making it an ideal choice for enterprise AI workloads. This has resulted in significant customer momentum for the cloud computing platform. This is evident considering that almost one-third of the 53,000 Azure AI customers are new to the Azure cloud computing platform itself in fiscal 2023.
The recently launched AI assistant Copilot, which is integrated into many of Microsoft's products, also saw a notable demand spike in 2023. Early CoPilot for Microsoft 365 users have noted a 29% improvement in speed in tasks such as searching, writing, and summarizing. GitHub CoPilot (used to assist code creation) is also being widely deployed with over 1.3 million paid subscribers, while more than 50,000 organizations use the GitHub CoPilot Business tier. The rapid adoption and subsequent monetization of CoPilot will also be a major growth catalyst in the coming years.
Microsoft released fiscal 2024 second-quarter data (for the period ending Dec. 31, 2023) this week showing revenue was up by 18% year over year and net income rose 33%. Both figures came in ahead of the consensus estimates. Considering its solid tailwinds and robust financials, Microsoft seems a compelling pick in 2024.
2. Alphabet
A digital advertising and AI behemoth, Alphabet operates multiple services, including Google Search, YouTube, Android, and Chrome. The company suffered a growth slowdown in the high inflationary environment of 2022, but an improving macroeconomic environment bodes well for the company's core advertising business.
Google's advertising revenue (which accounted for nearly 76% of Alphabet's total revenue), was up by almost 11% year over year to $65.5 billion in the fourth quarter. To further capture share in the $740.3 billion global digital advertising market, Alphabet has incorporated generative AI capabilities into its Google Search offerings through SGE (Search Generative Experience) to provide more comprehensive and insightful responses to users.
Alphabet is experimenting with its recently launched Gemini large language model to provide multimodal responses (which combine one or more from text, audio, videos, images, and code) to search queries. The company is leveraging AI to help users with diverse information needs such as complex queries, comparisons, longer queries, and those that may require multiple perspectives. All these initiatives will increase user engagement.
Alphabet is also helping businesses leverage generative AI technologies to improve their advertising campaigns and create better-performing advertisements. The company's AI-powered Performance Max product is helping social advertisers find and convert consumers through immersive and relevant visual creatives on platforms such as Google, Gmail, and Discover. Performance Max has resulted in advertisers realizing almost 6% more conversions per dollar compared to image-only ads and discovery campaigns.
Hence, considering Alphabet's moat in the digital advertising landscape and emphasis on AI initiatives to attract users and advertisers, the company seems to be an attractive pick -- especially when it's trading at a price-to-sales ratio of only 6.4.
3. HubSpot
A cloud-native CRM player, HubSpot is widely known for its capabilities in inbound marketing, sales, content management, operations, and commerce tailored mainly for small and medium businesses. The company caters to nearly 194,000 customers across 120 countries and multiple industries.
HubSpot also earns around 98% of its total revenue from recurring subscriptions. A large and diversified customer base, broad geographic footprint, and high revenue visibility highlight the resilience of the company's business model, a strong positive in uncertain economic times.
HubSpot's strategic move toward integrating AI into its CRM offerings is also expected to be a major growth catalyst in the coming years. Recently, the company released HubSpot AI, a comprehensive suite of AI-enabled tools designed to help businesses in several tasks, such as automating routine activities, generating predictive insights, and improving cost efficiency for CRM functions. These tools are already in high demand, considering that 40% of the enterprise customers had already used HubSpot AI at the end of the third quarter.
HubSpot's financial results in the third quarter underscore the success of its AI integration strategy. Revenue grew 26% year over year to $558 million, while non-GAAP net income rose 138% year over year to $83 million.
The company also generated $65 million in free cash flow and ended the third quarter with $1.7 billion in cash. With a strong AI-powered business model and robust financials, HubSpot's shares are well-positioned to surge even higher in the coming months.
