3 Best Artificial Intelligence Stocks to Buy in September
Many people have probably heard of artificial intelligence, but may not know exactly what AI entails.
The AI takes place in two phases; the learning or training phase, in which case an algorithm is “taught” how to react to incoming information from hoards of past data. The second phase is the “inference” phase, in which case a machine reacts to a prompt based on its learning without human interaction. Along the way, there’s quite a bit of software, processors, and memory that makes it all work, and there’s a lot of companies directly or tangentially involved.
One thing is certain: the AI revolution is taking off and is sure to enrich many companies in the 2020s. Today, three of the best positioned AI stocks are CrowdStrike (CRWD 5.77%), Alphabet (GOOG 5.20%) (GOOGL 5.11%)and Research (LRCX 6.16%). Here’s why each is a solid buy in September.
Using AI to disrupt the cybersecurity market
CrowdStrike (CRWD 5.77%) has more than tripled since Initial Public Offering a little over a year ago, but that shouldn’t stop you from taking a look at this endpoint cybersecurity company today. Although the company looks quite expensive with a market capitalization of $25 billion and a price-to-sales ratio of 45, CrowdStrike’s 85% growth rate and significant increase in gross margin reinforce optimism.
Why is this upstart cybersecurity firm in such tears? This is thanks to its disruptive cloud-born business model that uses AI to create a “network effect” that continually improves the product based on threat data from all of its customers. CrowdStrike’s Falcon Platform consists of its easily deployable lightweight agent that can connect to any enterprise endpoint, from servers to laptops, mobile devices and Internet of Things devices. Each endpoint sends data back to CrowdStrike’s centralized Threat Graph, which merges all that data to continuously improve the company’s defense algorithms.
CrowdStrike’s impressive management is nothing if not confident. In the company’s annual report, he writes, “by analyzing and correlating information from our massive, crowdsourced dataset, we are able to deploy our AI algorithms at cloud scale and create a smarter, more efficient solution to detect threats and stop breaches that on-premises or single-instance cloud products can’t match.”
There seems to be something there; in 2019, CrowdStrike fell from ninth place in the endpoint security market to fourth place, while the three companies above CrowdStrike all lost market share. Moreover, even after last year’s big market share gains, CrowdStrike only held 5.8% of the overall endpoint security market.
I would look to see CrowdStrike continue to gobble up more endpoint market share over the years while entering new segments of cybersecurity in the years to come. The company publishes its results on Wednesday, September 2. Interested investors may therefore wish to buy some of the shares now and then see what management has to say after the release and conference call.
Alphabet is an AI conglomerate
Guess which big company was an early investor in CrowdStrike. That would be Alphabet, which invested in the cybersecurity company in 2015 through its advanced growth investment entity Google Capital, or “CapitalG.”
But it’s not just through its two investment firms, CapitalG and Google Ventures, where Google has exposure to AI. No, AI is at the heart of most of Alphabet’s core products, even its core search engine, where AI-powered algorithms have improved core search function compared to algorithms developed by the man in recent years. YouTube video recommendations are also AI-dependent, and the portfolio’s rising star, Google Cloud Platform, offers a full suite of AI tools, from image recognition to speech and language AI, and more. by machine learning and other out-of-the-box tools. algorithms that customers can use. The same goes for Google’s hardware products, including its Google Home pod and Pixel smartphones.
Alphabet continued to invest heavily in AI, creating Google.ai in 2017 to work on cutting-edge AI search. Alphabet has even started making its own custom AI processors called Tensor processing units, which were first developed in 2016. And Alphabet is also making big hits in futuristic AI-related areas such as quantum computing and self-driving cars with its Waymo subsidiary.
Despite its tremendous search business and new high-growth segments like YouTube and Google Cloud, Alphabet has lagged behind the rest FANG inventory this year, even though it is up 23% for 2020.
I think investors are focusing too much on quarter-over-quarter growth numbers from the core search business, which has been temporarily impacted by the COVID-19 pandemic and lack of travel-related advertising. Yet given Alphabet’s vast cash resources and significant investments in cutting-edge AI research, investors should appreciate the long-term forest, not the short-term trees, which makes Alphabet a great buy at current prices.
This semi-equipment supplier has just increased its dividend
One thing is certain: AI will continue to require advanced processors, graphics chips, memory and storage. And while many chip companies are continuing this gold rush, manufacturing advanced processors and memory only goes through a few “picks and shovels” semiconductor equipment companies. Among them, Lam Research is currently showing some of the strongest profitability measures. In fact, after its strong June quarter, Lam Research has just announced that it is increasing its quarterly dividend by 13%, going from $1.15 to $1.30, or $5.20 on an annual basis, good for a return of 1.5%.
To help, Lam Research derives a disproportionate share of revenue from value-added services compared to its peers, around a third of its revenue base. Not only do Lam Research’s machines make chips for AI applications, but the company also uses AI to collect and process large amounts of data from its large and growing installed base of machines. Using this data, Lam has introduced value-added productivity services over the years that help customers reduce defects and increase yields, creating a win-win situation for Lam and its customers.
Not only is Lam’s installed base expected to grow each year as more and more advanced chips are produced, Lam has been able to increase its “revenue per room” by continuing to develop these additional value-added services.
With high profit margins, returns on capital, a steadily growing services segment and a still reasonable P/E ratio of 23, Lam still looks like one of the best risk-reward in the tech industry today.