The hot topic around the tech stock world is definitely artificial intelligence (AI). It seems that news related to AI is unavoidable, and almost every company is trying to show its shareholders where it is utilizing AI to improve its business. We may be in the hype cycle for AI right now, but it does seem like this technology is here to stay and could be significantly transformational to society.
As an investor, the trick is to separate the companies with legitimate AI businesses and those that are pretending. Here are two tech stocks that have legitimate tailwinds from the AI boom and are worth buying today and holding for the long term.
1. ASML
NASDAQ: ASML
Key Data Points
For a company that plays an indispensable role in the production of semiconductors, ASML (ASML +5.07%) might be the most important business you've never heard of. Based in the Netherlands, ASML manufactures the lithography machines that are necessary to make semiconductors. When it comes to the extreme ultraviolet lithography (EUV) machines needed for the most advanced chips, ASML is the only company in the world that makes and sells these ultra-accurate machines.
When you read about companies buying and designing more chips for AI applications, the fabrication facilities making those chips are using ASML machines to do so, and therefore this boom in artificial intelligence chip demand is a tailwind for ASML. The demand is so great that the company has a $42 billion backlog of queued-up orders. This helps the company keep revenue coming in even as the chip industry overall is in a cyclical downturn.
The demand for semiconductors will likely increase over time as society becomes more digitized and the push to develop AI large language models grows. Additionally, the desire to nearshore U.S. semiconductor manufacturing should lead to the construction of new fabrication facilities. All of these mean new lithography machines and more business for ASML.
2. CrowdStrike
NASDAQ: CRWD
Key Data Points
Before it was the hot topic on Wall Street, CrowdStrike (CRWD +1.25%) was making waves as the first cloud-native AI-driven cybersecurity company. CrowdStrike has two unique features to its business that differentiate it from its industry peers.
First, it was built to work in the cloud, giving it an advantage over legacy systems that had to pivot once cloud computing became prevalent. Second, it used AI from the beginning to detect threats and protect all its customers.
Put simply, CrowdStrike's Falcon platform uses AI to process trillions of bits of information and detect and prevent security breaches. Then, when a threat is detected anywhere in its customer base, the system learns and shares that learning with every CrowdStrike customer, protecting them all.
This network effect is powerful and one of the reasons the company has been so successful in growing its customer base and getting existing customers to spend more over time. In fiscal 2024 (the year ending December 2023), CrowdStrike doubled the number of deals with customers who purchased eight or more modules (what the company calls its products). Almost two-thirds of its customers have adopted five or more modules. It's clear customers see the value in CrowdStrike's product suite.
CrowdStrike has been generating positive cash flow for a while, but only recently tipped into generally accepted accounting principles (GAAP) profitability. Fiscal 2024 was a turning point for the bottom line. Compared to fiscal 2023, operating income increased by 86% in 2024, while earnings per share grew by 101% and free cash flow increased by 39%.
Leading the way in AI
There will be many ways to invest in AI over the coming years. Most of the headlines are driven by the chip companies and mega-tech businesses creating large language models and working on the next generation of AI applications.
With ASML and CrowdStrike, investors get strong businesses that are leaders in their respective industries, but that also have legitimate ties to AI. Both of these businesses are strong buys even without their AI tailwinds, but those tailwinds will benefit both companies in 2024 and beyond.
