In the modern business landscape, change is not just constant, but rapid and radical. With disruptive technologies, we see a seismic shift in conceptualizing productivity. Today's spotlight shines brightly on artificial intelligence, a pivotal element in the global productivity narrative.
As underscored by McKinsey & Company, breakthrough innovations like AI and automation are no longer potential game-changers – they are redefining the game entirely. These technologies have surged to the forefront of the global economy by bolstering productivity, yet the path forward is not without hurdles. There have been bumps in the road as individuals grapple with the new nuances that AI-driven protocols bring.
Digitalization and investment
A recurring motif in this narrative is digitalization, a force that persistently shapes our physical and virtual workplaces. Investing in AI techonology, therefore, is not a mere trend or a fleeting buzzword; it is an investment in the future of work and productivity.
As we delve deeper into this paradigm shift, we must remember that tech investing is a double-edged sword. As much as it has the potential to revolutionize the business world, it also has its unique set of challenges that must be astutely managed.
Investing in AI stocks
Investing in AI stocks can be prudent as these companies hold significant potential and deserve consideration in any well-rounded portfolio. Nonetheless, it is crucial to balance enthusiasm with prudence. Assessing their worth requires thorough research before adding them to your portfolio. To access the most up-to-date insights, one can utilize the comprehensive All-in-One Screener, a Premium feature provided by GuruFocus.
With this perspective, let's explore the potential, the challenges and the future of investing in AI with two companies actively involved in the space.
Snowflake
As the world increasingly digitizes, Snowflake Inc. (SNOW, Financial) emerges as a fascinating, albeit challenging, choice for investors. Amid a landscape where big data and AI continue to reshape the future of investing, this data cloud player has proven its mettle, delivering an impressive year-to-date return of over 36%.
Snowflake's financial results for its first quarter of fiscal 2024 highlighted a robust earnings beat by 197.4% and a promising product revenue growth forecast, ranging between $620 million to $625 million for the coming quarter. However, it was not all roses; while the company's revenue grew by 48% year over year, this pace was slower than the 85% surge in the prior-year fiscal quarter.
Growth and challenges
Yet, with product revenue, the lion's share of Snowflake's sales, showing a 50% year-over-year expansion, the company still maintains a healthy growth curve. Being at the forefront of the data cloud domain, it holds tremendous potential to yield substantial returns in the long run.
Nonetheless, the mere thought of growth deceleration is unbearable for investors. Consequently, the stock retains the capacity to experience rapid fluctuations within just a few sessions—volatility that proves too much for most investors to withstand.
Valuation and potential
Undeniably, Snowflake's lofty valuation, with a price-sales ratio of 26.3, might give investors pause. Yet a closer look at the figures reveals a rosier picture. The stock's performance has not caught up with its 48% revenue growth, effectively shrinking the multiple.
With a unique positioning in the vast data cloud arena and a forecasted $2 trillion addressable public cloud market by 2026, Snowflake's narrative remains one of compelling growth and potential.
Microsoft
Harnessing the potential of AI to spur growth, Microsoft Corp. (MSFT, Financial) is painting a riveting portrait of success. This tech giant is confidently charting its course with a year-to-date return of a hefty 48.2%, capturing the attention of market watchers.
The second-quarter earnings further confirm the company's compelling narrative. They reveal an impressive net income increase of 9.4% to $18.3 billion and a diluted earnings per share boost of 10.4%, comfortably beating the projected earnings by 9.8%.
AI initiatives and cloud strategy
Shining in the spotlight, Microsoft's strategic investments in the burgeoning AI industry, notably its affiliation with OpenAI, have carved out new avenues to outpace competitors. The collaboration is already bearing fruit as ChatGPT, one of OpenAI's creations, rapidly amassed over a million users in just five days. Further leveraging this advantage, Microsoft has tactfully integrated AI into its Bing search engine, challenging Alphabet's (GOOG, Financial) (GOOGL, Financial) monopoly in the online search industry.
Moreover, Microsoft is not a newcomer to AI-enabled services; its cloud-based AI initiatives are a testament to the company's futuristic vision. A seamless blend of AI and cloud computing, two sectors poised for stellar growth, has become a cornerstone of the company's ambitious strategy. As the second-largest player in the cloud market, boasting a commendable 23% market share, Microsoft's calculated gambits promise potentially lucrative returns in the coming decade.
Valuation
Microsoft's valuation appears to be higher due to the promising catalysts that are anticipated. Investors are factoring in the stock's potential, resulting in its current price-sales ratio of 12.5. This figure is notably higher than the historical range observed over the past decade, with a minimum price-sales ratio of 3.1, a median of 6.7 and a maximum of 14.8. The elevated ratio signifies that investors have optimistic expectations for Microsoft's growth and revenue prospects, leading to the current premium in the share price.
As we await the next earnings announcement, which is scheduled for July 25, Microsoft continues to underscore its proficiency in turning the AI wave into a worthwhile opportunity.
