About three decades ago, the advent of the Internet completely changed the arc of American business growth. Since then, countless forward-looking investments have been made with moderate success. However, the rise of artificial intelligence (AI) may be the first breakthrough innovation to rival the advent of the Internet.
AI and machine learning enable software and systems to learn and evolve without human intervention. The ability to perform tasks better and learn new tasks gives AI systems utility in most sectors and industries. This is likely the catalyst for PwC’s supernatural estimate that AI can contribute $15.7 trillion to the global economy by 2030.
Despite this staggering number, history teaches us that not every company will benefit from a breakthrough innovation. Although Wall Street and investors are absolutely excited about semiconductor stocks Nvidia (NASDAQ:NVDA)two high-growth AI stocks look like much smarter buys right now.
The infrastructure foundation of the AI movement may be in a giant bubble
On the surface, it’s easy to see why investors have been flocking to Nvidia since the start of 2023. Last year, revenue in the company’s data center segment rose 217% to $47.5 billion, with its A100 and H100 graphics processing units (GPUs) leading the way. In particular, Nvidia’s H100 chips are the preferred choice for companies looking to train large language models and run generative AI solutions.
Nvidia has also benefited from the AI GPU shortage. While Nvidia posted net revenue growth of 126% across all segments in fiscal 2024 (ending Jan. 28), cost of sales rose just 43%. This is a pretty clear indication that the company’s phenomenal pricing power for its in-demand GPUs drove the majority of that revenue growth.
However, don’t expect this superior pricing power to last for long. As the company increases its own production of A100 and H100 chips and new entrants enter the AI-accelerated data center space, the shortage of high-performance GPUs will diminish. Nvidia’s pricing power is expected to weaken in the coming quarters.
In addition, it is unlikely that Nvidia will receive successively larger orders from members of the “Magnificent Seven” after this year. The four largest customers account for around 40% of net sales and all develop their own GPUs. Over time, this should reduce Magnificent Seven shares’ reliance on Nvidia’s infrastructure.
However, the biggest concern of all may be just that every The next big trend and innovation that dates back 30 years has made its way through an early innings bubble. Professional and everyday investors have a terrible habit of overestimating the introduction of new innovations. It’s highly unlikely that AI will be the exception, and perhaps no company is more directly exposed to a burst event than Nvidia.
Instead of going against history, the following two wildly successful AI growth stocks look like brilliant buys.
Metaplatforms
The first high-octane AI stock that makes buying much smarter than Nvidia is a social media giant Metaplatforms (NASDAQ:META). Meta happens to be one of Nvidia’s “four biggest customers” that I mentioned earlier that are developing their own AI chips.
In addition to developing its own AI GPUs, Meta uses generative AI solutions in a variety of ways. Perhaps the most notable tool is a tool that helps advertisers tailor their message(s) to individual users.
Should the AI bubble burst, Meta would be able to weather the storm with minimal risk to its operational performance. Because almost 98% of company sales can be attributed to advertising. In other words, all that matters to Meta’s near-term operating results is how healthy the U.S. and global economies are.
Although there are select predictive indicators and monetary-based metrics that suggest that the U.S. economy may enter a recession in the not-too-distant future, history shows that periods of growth last significantly longer than downturns. For patient investors, the ad-supported model that Meta offers continues to pay off.
Meta owns a number of the most visited social websites worldwide, including Facebook, Instagram, WhatsApp, Threads and Facebook Messenger. Overall, the family of apps helped attract 3.24 billion daily active users to its platforms in the March quarter, and there were nearly 4 billion monthly active users at the end of December. This makes it the clear go-to source for advertisers, which should provide significant ad pricing power in the long run.
Another reason why investors can confidently buy Meta stocks is its impeccable balance sheet. Meta ended March with $58.1 billion in cash, cash equivalents and marketable securities and generated more than $19.2 billion in net cash from its operations. The company has more than enough capital to further tackle its Metaverse and AI ambitions without negatively impacting its fundamental advertising cash cow.
Meta is currently valued at just 12 times consensus 2025 cash flow estimates, an 18% discount to the average cash flow multiple over the past five years.
SentinelOne
A second high-growth artificial intelligence stock that investors can confidently buy instead of Nvidia is the endpoint cybersecurity solutions provider SentinelOne (NYSE:S).
SentinelOne’s security platform, known as Singularity, is powered by AI and machine learning to more efficiently detect and respond to potential threats across all system processes.
One of the many beauties of cybersecurity is that it is no longer an optional service. Businesses of all sizes with an online or cloud presence need to protect their data from robots and hackers who don’t take their time. Responsibility for this protection increasingly falls on third-party providers such as SentinelOne.
Although Wall Street was less than enthusiastic about SentinelOne’s full-year revenue forecast of $812 million to $818 million – the consensus forecast was $818 million – when it was published in March, the midpoint of the company’s forecast still implies 31% for that Full year. Year-on-year growth. There is a real possibility that this company could go from reported revenue of $621 million in fiscal 2024 (ending January 31, 2024) to annual revenue of over $2 billion by fiscal 2029.
Not only is SentinelOne growing rapidly, but it also benefits from its subscription-based operating model. At the end of fiscal 2024, annual recurring revenue (ARR) increased 39% to $724.4 million. Subscriptions provide the company with predictable cash flow, which has resulted in a hefty adjusted gross margin of nearly 80%. Recurring profitability shouldn’t be too far away.
Additionally, SentinelOne lands bigger fish. The number of customers generating at least $100,000 in ARR for the company increased 30% last year to 1,133, with these customers generating a net dollar retention rate of 115%. In short, larger customers are spending an average of 15% more compared to last year.
Once SentinelOne achieves recurring profitability, the share price could move higher.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams holds positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
“Forget Nvidia: Buy These 2 Hypergrowth Artificial Intelligence (AI) Stocks” was originally published by The Motley Fool