Roughly three decades ago, the advent of the internet completely changed the growth arc for corporate America. Since then, countless next-big-thing investments have come and gone with moderate success. However, the rise of artificial intelligence (AI) may be the first game-changing innovation that gives the advent of the internet a run for its money.
With AI and machine learning, software and systems are able to learn and evolve without human intervention. The ability to become more proficient at their tasks, as well as learn new tasks, gives AI systems utility in most sectors and industries. It's the likely catalyst behind PwC's otherworldly estimate that AI can add $15.7 trillion to the global economy by 2030.
Image source: Getty Images.
Despite this eye-popping figure, history tells us that not every company will benefit from a next-big-thing innovation. Although Wall Street and investors are absolutely enamored with semiconductor stock Nvidia (NVDA -1.99%), two hypergrowth AI stocks look like considerably smarter buys right now.
The infrastructure foundation of the AI movement may be in a massive bubble
On the surface, it's easy to see why investors have flocked to Nvidia since 2023 began. Last year, the company's Data Center segment sales surged 217% to $47.5 billion, with its A100 and H100 graphics processing units (GPUs) leading the charge. In particular, Nvidia's H100 chips are the preferred choice of businesses wanting to train large language models and run generative AI solutions.
Nvidia has also benefited from AI-GPU scarcity. Whereas Nvidia recorded 126% net sales growth across all segments in fiscal 2024 (ended Jan. 28), its cost of revenue rose by only 43%. This is a pretty clear indication that phenomenal pricing power for its in-demand GPUs drove the bulk of this sales growth.
But don't expect this superior pricing power to last much longer. As the company increases its own production of A100 and H100 chips, and new entrants enter the AI-accelerated data center space, high-powered GPU scarcity is going to decline. Nvidia's pricing power will probably weaken in the quarters to come.
Additionally, Nvidia is unlikely to see successively larger orders from members of the "Magnificent Seven" after this year. Its top four customers make up around 40% of its net revenue, and they're all developing their own GPUs. Over time, this should lessen the reliance of the Magnificent Seven stocks on Nvidia's infrastructure.
However, the biggest concern of all might just be that every next-big-thing trend and innovation dating back 30 years has navigated its way through an early innings bubble. Professional and everyday investors have a terrible habit of overestimating the adoption and uptake of new innovations. It's highly unlikely that AI is going to be the exception, and arguably no company is more directly exposed to a bubble-bursting event than Nvidia.
Instead of going against history, the following two supercharged AI growth stocks look like genius buys.
Image source: Getty Images.
Meta Platforms
The first high-octane AI stock that makes for a considerably smarter buy than Nvidia is social media colossus Meta Platforms (META -0.28%). Meta happens to be one of Nvidia's "top four customers" I alluded to earlier that's developing its own AI chips.
Aside from developing in-house AI-GPUs, Meta is deploying generative AI solutions in a variety of ways. Perhaps the most notable is as a tool to help advertisers tailor their message(s) to individual users.
If the AI bubble were to burst, Meta would be able to navigate the storm with minimal risk to its operating performance. That's because almost 98% of the company's revenue can be traced to advertising. In other words, all that really matters to Meta's near-term operating results is how healthy the U.S. and global economy are.
Though there are select predictive indicators and money-based metrics that suggest the U.S. economy could fall into a recession in the not-too-distant future, history shows that periods of growth last significantly longer than downturns. For patient investors, the ad-driven model that Meta offers continues to pay off.
Meta owns a number of the most-visited social sites globally, including Facebook, Instagram, WhatsApp, Threads, and Facebook Messenger. Collectively, its family of apps helped lure 3.24 billion daily active users to its platforms in the March-ended quarter, and close to 4 billion monthly active users as of the end of December. This makes it the clear go-to for advertisers, which should support substantial ad-pricing power over the long run.
Another reason investors can confidently buy Meta stock is its pristine balance sheet. Meta closed out March with $58.1 billion in cash, cash equivalents, and marketable securities, and it generated more than $19.2 billion in net cash from its operations. It has more than enough capital to continue to tackle its metaverse and AI ambitions without adversely impacting its foundational advertising cash cow.
Meta is currently valued at just 12 times consensus cash flow estimates for 2025, which represents an 18% discount to its trailing-five-year average multiple to cash flow.
SentinelOne
A second hypergrowth artificial intelligence stock that investors can confidently buy instead of Nvidia is endpoint cybersecurity solutions provider SentinelOne (S -1.26%).
SentinelOne's security platform, known as Singularity, relies on AI and machine learning to become more efficient at autonomously recognizing and responding to potential threats across all system processes.
One of the many beauties of cybersecurity is that it's no longer an optional service. Businesses of any size that have an online or cloud-based presence need to protect their data from robots and hackers that don't take time off. Increasingly, the onus of this protection is falling to third-party providers, like SentinelOne.
Though Wall Street was less than thrilled with SentinelOne's full-year sales guidance of $812 million to $818 million -- the consensus forecast was for $818 million -- when it was issued in March, the midpoint of the company's guidance still implies 31% year-over-year growth. There's a real possibility this company could catapult from a reported $621 million in sales in fiscal 2024 (ended Jan. 31, 2024) to north of $2 billion in annual revenue by fiscal 2029.
Aside from growing at a lightning-quick pace, SentinelOne is benefiting from its subscription-driven operating model. As of the end of fiscal 2024, its annualized recurring revenue (ARR) jumped by 39% to $724.4 million. Subscriptions provide the company with predictable cash flow, which has led to a juicy adjusted gross margin that's closing in on 80%. Recurring profitability shouldn't be too far off.
Furthermore, SentinelOne is landing bigger fish. The number of customers generating at least $100,000 in ARR for the company jumped 30% to 1,133 last year, with a dollar-based net retention rate of 115% among these clients. In short, its larger customers are spending an average of 15% more from the previous year.
Once SentinelOne reaches recurring profitability, the sky could be the limit for its share price.
