Following the introduction of ChatGPT, billionaire Bill Gates wrote, "Artificial intelligence (AI) is as revolutionary as mobile phones and the internet." That implies substantial wealth creation in the coming years.
Morgan Stanley estimates generative AI revenue across software and internet companies will increase more than 600% to approach $1.1 trillion by 2028. Palantir Technologies probably comes to mind for many readers, given how well the stock has performed. But AppLovin (APP 2.28%) and CoreWeave (CRWV 5.44%) are also well positioned to benefit.
Image source: Getty Images.
1. AppLovin
AppLovin designs adtech software that lets developers market and monetize their applications across mobile and connected TV campaigns. Traditionally, most advertising on its platform has focused on video games, but the company is expanding on its primary market with a new e-commerce advertising product.
AppLovin has differentiated itself with artificial intelligence (AI). Morgan Stanley says the company has a "best-in-class" recommendation engine called Axon that targets advertising campaigns with sophisticated machine learning models. Additionally, its in-house creative agency, SparkLabs, use generative AI to create personalized ad content for clients.
AppLovin reported fantastic first-quarter financial results. Total revenue increased 40% to $1.4 billion, as strong sales growth in the advertising segment offset a decline in the mobile games segment. Meanwhile, generally accepted accounting principles (GAAP) earnings climbed 149% to $1.67 per diluted share. And management guided for 69% advertising sales growth in the second quarter.
Importantly, AppLovin recently sold its mobile games portfolio for $800 million. That decision benefits the company in two ways. First, sales in that segment have been declining, so the divestiture eliminates the weakest part of the business. Second, it allows AppLovin to focus on its core adtech software business, including its nascent e-commerce product.
Wall Street estimates AppLovin's earnings will increase at 43% annually through 2026. That makes the current valuation of 64 times earnings look fair, especially when the company beat the consensus estimate by an average of 33% in the last six quarters. Risk-tolerant investors should feel comfortable buying a small position today.
2. CoreWeave
CoreWeave provides cloud infrastructure and software services. The company runs the leading GPU cloud, meaning data center infrastructure that's purpose-built to support artificial intelligence (AI) applications and other complex workloads that need to be accelerated with graphics processing units (GPUs). The company uses Nvidia GPUs exclusively.
CoreWeave has differentiated itself in a few important ways. First, it has regularly achieved strong results at the MLPerf benchmarks, objective tests that evaluate the performance of AI systems across training and inference workloads. Second, the company is often among the first cloud providers to deploy new Nvidia technology due to its close relationship with the chipmaker.
"CoreWeave is built to move faster -- and time and time again, we've proven it by being first to operationalize the most advanced systems at scale," CEO Michael Intrator said earlier this year after the company launched Nvidia GB200 NVL72 systems ahead of its peers. That edge, coupled with expertise in managing large GPU clusters, explains why CoreWeave is growing like wildfire.
First-quarter revenue soared 420% to $981 million, and adjusted operating income (which excludes stock-based compensation and interest payments) rose 550% to $162 million. However, CoreWeave has $7.8 billion in long-term debt and lease obligations. Interest on that debt consumed about one-quarter of revenue, which led the company to report a non-GAAP loss of $150 million.
CoreWeave is not yet profitable, so it's difficult to value the stock. Having said that, the current price-to-sales ratio is 21. That is neither cheap nor outrageously expensive for a company that just reported triple-digit sales growth, especially when that sales growth came with a 73% gross margin. Patient investors comfortable with volatility should buy a small position.
