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2020 has been an eventful year, to say the least. All was well the first two months of the new decade before all hell broke loose, and while the global economy remains in various stages of lockdown and in recession due to you-know-what, the U.S. stock market indices have rallied to close to where they started at the onset of the year.
Leading the charge in this new era are technology stocks — specifically those helping organizations and individuals cope with shelter-in-place and work-from-home orders. Artificial intelligence (AI) was already a promising growth industry, but recent events have made the need for automation and efficient use of data more important than ever. Playing out as a top investment motif for the decade ahead, don't worry if you missed the big stock market rebound the last two months. Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), salesforce.com (NYSE:CRM), and NVIDIA (NASDAQ:NVDA) are still great buys in June.
More than just internet search
Headed into first-quarter earnings, there was ample worry that companies that rely heavily on advertising (ahem, Google) would get hit extra hard. After all, when lean economic times arrive, consumers tighten their belts, which means advertising has a lower return on investment. And thus businesses also tighten their belts on ad budgets.
But it's often overlooked just how flexible search-based ads can be, and the ease of how Google Search spending can get turned off and on again was a hindrance to the company during the worst of the lockdown crisis in March. But the rebound will likely be very quick, just as it was over a decade ago during the financial crisis of 2008 and 2009. Google parent Alphabet's revenue and earnings-per-share growth of 13% and 4%, respectively, were muted in the first quarter, but the tech titan remains in really good shape as the economy slowly gets back to some semblance of normal.
As it pertains to AI, internet search like Google is going to undergo some big changes in the years ahead (more on that under the NVIDIA heading). But it's the Google Cloud segment that really gets me excited. It seems that Google has finally figured out how to leverage its lead in other tech proficiencies to drive growth here as well, and the company is catching up to public cloud leaders Amazon Web Services and Microsoft Azure.
Google Cloud hauled in $2.78 billion in the first quarter, good for a massive 52% year-over-year increase. Once an afterthought, the segment made up nearly 7% of the top line to kick off 2020. If it can sustain its recent trajectory, that's going to have a massive effect on earnings in the years ahead as organizations continue to adapt to a digital-first age and put cloud-based operations to better use. Alphabet stock trades for 35.4 times trailing 12-month free cash flow (what's left after cash operating and capital expenses are paid) as of this writing, but a premium valuation is warranted for this fast-growing and highly profitable AI enterprise.
Software is more than a productivity booster
Speaking of organizations needing to adapt to the digital era, Salesforce and rival Adobe have built themselves into the leaders in propelling digital transformation. In the past, productivity tools like Microsoft Office grew by leaps and bounds to become basic staples of businesses large and small. Today, something similar is happening with Salesforce's suite of software as it helps organizations with all aspects of customer relationship and data management.
The proof of such secular change is in the numbers, and Salesforce once again delivered. Even as a massive company itself (valued at a market cap of nearly $160 billion as of this writing), its annualized revenue growth has never dipped below 20%. The fiscal first-quarter report card delivered growth of 30% from a year ago, helped by the takeover of data analytics firm Tableau, and full-year guidance called for at least 17% growth. Guidance is often under-promised and over-delivered on, so Salesforce's days of 20%-plus growth may not be over yet. But even if they are, it's more than respectable guidance given the current state of global affairs.
What makes this an AI stock? Built into Salesforce's suite of software — which covers sales, service, marketing, and data management services — are AI-based insights fueled by the company's machine learning platform quaintly dubbed “Einstein.” It gives users instant actionable items to help improve decision making and ultimately deliver a better experience for customers. Rather than replacing human input, Salesforce demonstrates that AI has the power to free up human time to focus on higher-order activities, chief among them relationships with other humans.
Given that Salesforce remains in high-growth mode even with the economy down in the dumps, it too fetches premium pricing. Shares trade for 45.1 times trailing 12-month free cash flow. But for now, this software company is all about maximizing sales potential — profits will come later. However, given its track record, the stock isn't an unreasonable value for those looking to bet on the AI movement for the long haul.
The hardware that powers AI
For the end user, AI is all about software. Be it a personal recommendation of new music based on past preferences or online account help from a chatbot, complex software algorithms with the ability to learn and adapt are getting deployed across the internet and cloud-based services. The movement is only just getting started, but the way things are headed, AI software will be a ubiquitous presence in the near future.
Under the hood, though, is powerful new hardware supporting the software. And NVIDIA is helping lead the charge on this front with its graphics processing units (GPUs). The GPU has long been synonymous with high-end video game graphics, but the innovation engine at NVIDIA has opened the door to myriad new uses for the specialized computing chips. While internet search may be the most apparent form of AI, NVIDIA's wares are getting put to use to train and deploy machine learning all over the place — from autonomous driving to healthcare imaging to automation of manufacturing. This chip giant has become a common part of daily life, operating behind the scenes unbeknownst to most.
Fiscal first-quarter revenue increased 39% year over year, building on the company's momentum late last year as it reapproaches all-time highs for annual sales after a cyclical slump in 2018 and 2019. Its recent trajectory will likely remain intact, propelled by the takeover of data center networking gear company Mellanox on the first day of the second quarter. Paired with its GPU business, NVIDIA-plus-Mellanox will remain at the front of the pack developing hardware technology that underpins the AI movement for some time.
Much like the other two stocks listed, that leadership doesn't come cheap. NVIDIA trades for 49.1 times 12-month free cash flow. However, given the high rate of growth expected this year (fiscal second-quarter revenue should be up over 40%) and the even faster pace profits are rolling in with those new sales, it too isn't an unreasonable sum. Plus, with the rollout of AI a trend that is going to unfold over many years, there is plenty of room for the semiconductor industry leader to keep running. I call the stock a buy in June after a great start to 2020.
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