2 Rising Stocks of Artificial Intelligence (AI) That Are More Than Just Advertisements

It seems that all modern technological innovations are subject to some kind of hype cycle. The most famous is the dot-com bubble of the late 1990s and early 2000s. Nasdaq more than doubled from the beginning of 1997 to the zenith of March 2000. Many think that an artificial intelligence (AI) bubble is now forming; many others disagree. One of the main differences between companies now and those during the dot-com bubble is profitability.

While many tech companies at the time had few sales and no profits, dozens of companies in the AI ​​industry today are cash-flow positive, have growing revenues or are very profitable — not just advertised. This is a critical 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 that data needs memory — tons of it. Micron (NASDAQ: MU) is a global leader in providing DRAM (dynamic random access memory) and NAND (flash memory), which are used in smartphones, PCs, memory cards, data centers, etc. After a rough fiscal 2023, Micron is back in a big way.

In fiscal 2023, Micron struggled with geopolitical issues that hampered Chinese sales and a market where its products were not in demand due to oversupply. In other words, many of its customers were using existing inventory instead of buying more from Micron. Sales fell from $31 billion in fiscal 2022 to $16 billion in fiscal 2023. The industry is cyclical; in 2023, it was down, but now things are looking up.

Artificial intelligence powers two trends that will be tailwinds for Micron. First, hundreds of data centers come online every year, and this trend is expected to continue for many years. Micron’s management says its HBM (high-bandwidth memory) sales will reach hundreds of millions this fiscal year and “many billions” next fiscal year. AI will then drive demand for improved computers and smartphones, and these AI-ready systems will require more memory, a direct benefit to Micron.

Micron reported $6.8 billion in revenue in the third quarter of fiscal 2024, an 81% year-over-year increase and a significant margin improvement due to strong demand. Operating income improved year over year from a loss of $1.8 billion to a profit of $719 million.

The stock’s valuation is underwhelming given its gains last year and upside recovery this year. Analysts’ average earnings per share (EPS) expectation this year is just $1.23, giving Micron a price-to-earnings (P/E) ratio of over 100 at the current price; however, this is not the whole story. As shown below, analysts are predicting a massive increase in EPS next year to $9.48, which would make the P/E just 14.

The low valuation based on fiscal 2025 estimates and significant tailwinds make Micron a strong long-term investment.

CrowdStrike

Cybersecurity is always a priority for executives because the costs of breaches, in terms of direct costs, downtime, recovery, etc., can be huge. The most successful breaches occur through endpoints, so companies seek protection from AI-powered defenses such as CrowdStrikeS ‘ (NASDAQ: CRWD ) Falcon Platform.

Falcon is completely cloud-based and modular, so companies can add features as needed. Selling add-on modules is part of CrowdStrike’s land sales and expansion strategy, which is working well. As of Q1 FY25, 65% of customers used at least five modules and 28% used seven or more.

Demand for endpoint protection drives tremendous growth for CrowdStrike’s sales and free cash flow, as shown below.

The incredible sales growth and nearly 32% free cash flow margin over the past 12 months show why investors are buying the stock in droves. The stock is up 50% year to date in 2024 and 500% over the past five years. However, the epic growth has pushed the stock’s price-to-sales (P/S) ratio extremely high.

CrowdStrike’s P/S ratio is now near 29, higher than the other high-growth software company Palantir and cyber security companies like Palo Alto Networks AND Zscaler:

CRWD PS report data by YCharts

Investors should be cautious about buying CrowdStrike because of its valuation; however, the company’s results are spectacular and it has an incredible future.

The artificial intelligence boom is in full swing, and many companies are reaping the rewards. Tech investors: Keep Micron and CrowdStrike on your radar.

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Bradley Guichard has positions in CrowdStrike, Micron Technology and Palo Alto Networks. The Motley Fool has positions in and recommends CrowdStrike, Palantir Technologies, Palo Alto Networks and Zscaler. The Motley Fool has a disclosure policy.

2 Rising Artificial Intelligence (AI) Stocks That Aren’t Just Hype was originally published by The Motley Fool