Every modern technological innovation seems to go through some kind of hype cycle, most famously the dot-com bubble of the late 1990s and early 2000s. Nasdaq It more than doubled between the start of 1997 and its peak in March 2000. Many believe we are currently in an artificial intelligence (AI) bubble, but many disagree. One of the main differences between today's companies and those from the dot-com bubble era is profitability.
While many technology companies back then had little revenue or profit, dozens of companies in the AI space today are cash flow positive, experiencing fast revenue growth, and are not just hyped but extremely profitable. This is an important distinction that can help guide your investment strategy. Here are two companies that fit this mold:
Micron Technology
If there's one thing AI needs, it's data, and this data requires a lot of memory. micron (Nasdaq: MU) Micron is a global leader in providing DRAM (dynamic random access memory) and NAND (flash memory) used in smartphones, PCs, memory cards, data centers, etc. After a tough fiscal year 2023, Micron has made a big comeback.
In fiscal year 2023, Micron battled geopolitical issues that hindered sales in China and a market with no demand for its products due to oversupply. In other words, many of its customers used existing inventory rather than buying more from Micron. Revenues fell from $31 billion in fiscal year 2022 to $16 billion in fiscal year 2023. The industry is cyclical and was down in 2023 but is now turning around.
AI is driving two trends that Micron benefits from. First, hundreds of data centers are coming online every year, a trend that is expected to continue for years to come. Micron executives have said HBM (high-bandwidth memory) sales will reach hundreds of millions of dollars this year and “billions of dollars” next. Second, AI is driving demand for PC and smartphone upgrades, and these AI-enabled systems require more memory, directly benefiting Micron.
Micron reported third-quarter fiscal 2024 revenue of $6.8 billion, up 81% year over year, with strong margin improvements due to rising demand. Operating income improved year over year to a profit of $719 million from a loss of $1.8 billion.
Last year's profitability and this year's gradual recovery have made this stock unbalanced in valuation. The average analyst EPS (earnings per share) forecast for this year is just $1.23, which at the current stock price gives Micron a price-to-earnings (P/E) ratio of over 100. But that's not the whole story. As you can see below, analysts are forecasting a significant increase in EPS to $9.48 next year, which would give a P/E of just 14.
A low valuation and significant tailwinds based on fiscal 2025 projections make Micron a solid long-term investment.
Crowdstrike
Cybersecurity is always a priority for business owners as the cost of a breach can be huge in terms of direct costs, downtime, recovery, etc. Since most breaches occur through the endpoint, businesses are looking for AI-powered protection that: Crowdstrikeof (Nasdaq: CRWD) Falcon Platform.
Falcon is fully cloud-based and modular, so companies can add functionality as they need it. Selling additional modules is part of CrowdStrike's “acquire and grow” sales strategy, and it's working well: As of the first quarter of fiscal 2025, 65% of customers were using at least five modules, and 28% were using seven or more modules.
As you can see below, demand for endpoint protection has led to incredible growth in CrowdStrike's revenue and free cash flow.
One look at the impressive sales growth over the past 12 months and a free cash flow margin of nearly 32% and you can see why investors are eager to buy this stock: the stock is up 50% so far in 2024 and 500% over the past five years. But this impressive gain has also resulted in an extremely high price-to-sales multiple (P/S).
CrowdStrike's P/S ratio is currently nearly 29, higher than other high-growth software companies. Palantir Cybersecurity companies, etc. Palo Alto Networks and Zscaler:
CRWD PS Ratio Data by YCharts
Investors should be cautious about buying CrowdStrike given its valuation, but the company's performance is impressive and its future prospects are great.
The artificial intelligence boom is in full swing and many companies are reaping the benefits. Tech investors, take note: Micron and CrowdStrike.
Should you invest $1,000 in Micron Technology right now?
Before buying Micron Technology stock, consider the following:
of Motley Fool Stock Advisor The analyst team Top 10 Stocks Here are the stocks investors should buy now…Micron Technology was not among them. The 10 selected stocks have the potential to generate big gains over the next few years.
Things to consider NVIDIA This list was created on April 15, 2005…If you invested $1,000 at the time of recommendation, That comes to $786,046.!*
Stock Advisor With portfolio construction guidance, regular updates from our analysts, and two new stock picks every month, we provide investors with an easy-to-follow blueprint for success. Stock Advisor The service is More than 4 times First S&P 500 recovery since 2002*.
View 10 stocks »
*Stock Advisor returns as of July 2, 2024
Bradley Guichard has invested in CrowdStrike, Micron Technology, and Palo Alto Networks. The Motley Fool has invested in and recommends CrowdStrike, Palantir Technologies, Palo Alto Networks, and Zscaler. The Motley Fool has a disclosure policy.
2 Fast-Rising Artificial Intelligence (AI) Stocks That Aren't Just the Hype Originally published by The Motley Fool
