The rapid growth of the artificial intelligence (AI) market has lit a burning fire among many tech stocks over the past year. This hot market could get even hotter in the coming years, but many of the biggest names in AI, including Microsoft And Nvidia — these are already stocks worth billions of dollars.
These four-point valuations are impressive, but they may not be the best option for investors looking for millionaire gains. For bigger long-term gains, investors should look for smaller AI companies that have greater upside potential than trillion-dollar market leaders. I think these three smallest AI actions fit this description: Cloud Flare (NYSE:NET), UiPath (NYSE:PATH)And SentinelOne (NYSE:S).
1. Cloudflare
Cloudflare’s Content Delivery Network (CDN) accelerates digital content delivery for websites. It does this by storing caches of photos, videos, and online applications on edge servers located closer to website visitors than the original server. It also protects websites from bot-based attacks.
Cloudflare’s revenue jumped 52% in 2021 and 49% in 2022. But its revenue grew only 33% in 2023 and expects 27% growth in 2024.
This slowdown is mainly due to macroeconomic difficulties which have forced many companies to limit their spending on software. But its number of large customers (who spend more than $100,000 per year) still grew 35% in 2023 – and its net dollar retention rate remained above 115% over the past year.
Its adjusted gross margins also remain above its target range of 75% to 77%, and its adjusted earnings per share (PES) almost quadrupled for the year. The company expects its adjusted EPS to rise another 18-20% in 2024 as it streamlines spending amid its cyclical downturn.
Cloudflare may not initially appear to be an AI stock, but it rolled out its dedicated “Workers AI” platform last year to directly build AI applications such as chatbots on its CDN. The company has also begun installing GPUs from Nvidia’s data centers into its edge networks to accelerate these AI tasks and offset processing pressure on the company’s original servers.
Cloudflare’s stock isn’t cheap, 20x this year’s sales, but its leading position in the CDN market and strong foothold in the AI market could justify its premium valuation.
2. UiPath
UiPath develops software robots that can be connected to a company’s infrastructure to automate repetitive tasks such as data entry, invoice management, customer onboarding and mass emailing.
It doesn’t think new generative AI tools like ChatGPT will replace its robotic process automation (RPA) services. Instead, it plans to upgrade its own RPA services with more generative AI tools so they can better analyze and understand data instead of just automating repetitive tasks.
UiPath’s revenue grew 81% in fiscal 2021 (which ended in January 2021), as the pandemic pushed companies to automate more tasks with its software robots. Revenue grew 47% in fiscal 2022, but grew only 19% in fiscal 2023 as inflation, rising interest rates and geopolitical conflicts forced many companies to limit their spending on software.
This slowdown has spooked investors, but UiPath expects revenue to grow 21% in fiscal 2024 as the stabilizing macroeconomic environment prompts more companies to resume their digital transformation strategies. Analysts expect its adjusted EPS to more than triple for the year as it reins in spending.
At its 2022 Investor Day, UiPath predicted that its total addressable market could grow from $61.1 billion to $93.2 billion by 2025. Longer term, Fortune Business Insights estimates that the market Global EPS will experience a compound annual growth rate of 20% from 2023 to 20%. 2030.
Based on these bullish expectations, UiPath still appears reasonably valued at 47 times forward earnings.
3. SentinelOne
SentinelOne is a cybersecurity company that aims to replace all human analysts with AI algorithms on its Singularity XDR (extended detection and response) platform. It’s an ambitious goal, and it’s grown like a weed since its initial public offering (IPO) in 2021.
SentinelOne’s revenue has more than doubled in each of the last three fiscal years and expects 46% growth in fiscal 2024 (which ended in January). It is still unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP (adjusted) measures, but its adjusted gross margins are increasing and its operating losses are narrowing.
SentinelOne is still a highly speculative play that faces stiff competition from big cybersecurity companies like Palo Alto Networks And Crowd strike. But it’s still trading below its IPO price and appears reasonably valued relative to its growth of 11 times next year’s sales.
SentinelOne is often discussed as a potential takeover target, but it could expand its business itself over the coming years and benefit from secular growth in the cybersecurity and AI markets.
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Leo Sun holds positions in CrowdStrike and Palo Alto Networks. The Motley Fool ranks and recommends Cloudflare, CrowdStrike, Microsoft, Nvidia, Palo Alto Networks and UiPath. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Millionaire Artificial Intelligence (AI) Stocks was originally published by The Motley Fool
