All modern technological inventions seem to go through some sort of hype cycle. The most famous is the dot-com bubble of the late 1990s and early 2000s. gave Nasdaq More than doubled from the beginning in 1997 to the zenith in March 2000. Many believe that an artificial intelligence (AI) bubble is now forming. Many others disagree. A key difference between companies now and companies during the dot-com bubble is profitability.
While many tech companies had little sales and no profits at the time, dozens of companies in the AI industry today are cash-flow positive, have grown revenues, or are extremely profitable — not just the hyped ones. 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 that data needs memory — lots of it. Micron (NASDAQ: MU ) It 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 difficult fiscal 2023, Micron is back on track in a big way.
In fiscal 2023, Micron battled geopolitical issues that hampered Chinese sales and a market where demand for its products was oversupplied. In other words, many of its customers were using existing inventory instead of buying more from Micron. Sales will drop from $31 billion in fiscal 2022 to $16 billion in fiscal 2023. Industry is cyclical. In 2023, it was down, but now things are looking up.
AI powers two trends that will be tailwinds for Micron. First, hundreds of data centers are coming online each 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 “several billions” next fiscal year. Subsequently, AI will increase the demand for upgrading PCs and smartphones, and these AI-ready systems will require more memory, which will directly benefit Micron.
Micron reported revenue of $6.8 billion in the third quarter of fiscal 2024, an 81 percent increase over the prior year and a significant improvement in margins due to higher demand. Year-over-year operating income improved to a profit of $719 million from a loss of $1.8 billion.
The stock's valuation is exceptional due to its gains last year and an incremental recovery this year. Analysts' average earnings per share (EPS) expectations for this year are 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 predict a massive EPS jump to $9.48 next year, bringing the P/E to just 14.
A low valuation based on fiscal 2025 projections and significant tailwinds make Micron a long-term investment.
Crowd strike
Cybersecurity is always a priority for executives because the costs of breaches, in terms of direct costs, downtime, recovery, etc., can be enormous. Most successful breaches happen through endpoints, so companies clamor for protections like AI-powered protection. Crowd strikeOf (NASDAQ: CRWD ) Falcon Platform.
Falcon is fully cloud-based and modular, so companies can add features as needed. Selling additional modules is part of CrowdStrike's land and expansion sales strategy, which works well. By Q1 FY25, 65% of users used at least five modules, and 28% used seven or more.
Demand for endpoint protection drives incredible growth for CrowdStrike's sales and free cash flow, as shown below.
Incredible sales growth over the past 12 months and a free cash flow margin of around 32% show why investors are buying the stock by the fistful. The stock has gained 50% so far in 2024 and 500% in the past five years. However, the epic rally has pushed the stock's Price-to-Sales (P/S) ratio too high.
CrowdStrike's P/S ratio now hovers around 29, higher than fellow high-growth software companies Palantir And cyber security companies like Palo Alto Networks And Zscaler:
CRWD PS ratio data via YCharts
Investors should be cautious about buying CrowdStrike because of its value; However, the company's results are outstanding, and its future is bright.
The rise of artificial intelligence is in full swing, and many companies are taking advantage of it. Tech Investors: Put Micron and CrowdStrike on Your Radar
Should you invest $1,000 in Micron Technology now?
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Bradley Guichard holds positions at CrowdStrike, Micron Technology, and Palo Alto Networks. The Motley Fool holds 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.