Day: October 6, 2024

Market research firm IDC recently released a report stating that the global artificial intelligence (AI) market is now worth $235 billion, and the good part is that this technology still has a lot of room for growth over the next five years.

IDC estimates that global spending on AI and generative AI could hit $631 billion in 2028. There are several ways for investors to benefit from this massive opportunity. From hardware companies such as Nvidia to software providers such as Palantir and cloud computing companies such as Oracle, investors can be spoiled for choice when looking to buy an AI stock right now.

Cloudflare (NYSE: NET), however, may not be on many investors’ minds when scouting for an AI stock to add to their portfolios. The company has made its name in the cybersecurity industry by helping customers secure their internet connections while improving the reliability and quality of the connections at the same time. However, it is now making a concerted push in the AI market as well.

Let’s take a closer look at Cloudflare’s AI-focused initiatives and check why this technology has the potential to supercharge its growth.

Cloudflare has set its sights on lucrative AI markets

Cloudflare has been using its cybersecurity credentials to bolster its prospects in the cloud AI space. In September last year, the company launched the Workers AI platform through which developers can run AI inference applications on Cloudflare’s network. The company has been procuring Nvidia’s GPUs (graphics processing units) and networking switches to build an edge AI network in cities across the globe that will allow developers to make AI apps without having to purchase any hardware of their own.

Cloudflare says that it has now deployed GPUs across 180 cities globally. This number has the potential to go higher, considering that the company has data centers in 300 cities worldwide. The company says that it intends to “make it possible for any organization globally to start deploying AI models — powered by Nvidia GPUs, networking, and inference software — without having to worry about managing, scaling, optimizing, or securing deployments.”

In simpler words, organizations and developers looking to jump onto the AI bandwagon can simply rent Cloudflare’s infrastructure without having to incur the huge capital expenses they would have had to if they were to buy their own GPUs and deploy their own servers. It is worth noting that the infrastructure-as-a-service (IaaS) market that Cloudflare is targeting with this strategy is expected to be worth $580 billion in 2030.

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Additionally, the company currently has a platform of more than 1 million developers to whom it can upsell its new services, such as Workers AI. However, Cloudflare isn’t going to restrict itself to the cloud AI market. The company has just announced a new AI offering called AI Audit. The tool will allow websites and content creators to see how AI bots access and use their content, give them the ability to block access, and also charge for the content that AI bots are accessing.

In other words, Cloudflare could help content creators and websites charge AI companies, and it won’t be surprising to see this offering gain traction once it is completely rolled out. That’s because the adoption of generative AI in content creation is set to grow at an annual pace of 31% over the next decade, according to Market.us.

Cloudflare is already growing at a healthy pace, and AI could give it a shot in the arm

When Cloudflare announced its second-quarter 2024 results in August, the company reported a 30% year-over-year increase in revenue to $401 million. Even better, the company’s adjusted earnings doubled year over year to $0.20 per share. The impressive year-over-year growth in Cloudflare’s revenue and earnings can be attributed to its existing customers spending more money on Cloudflare’s offerings.

For instance, the number of Cloudflare customers with more than $100,000 in annualized revenue stood at 3,046 in the second quarter, up 30% year over year. That was higher than the 20% year-over-year growth in Cloudflare’s paying customer base last quarter. Moreover, the company’s dollar-based net retention rate of 112% in Q2 indicates that its existing customers have either increased their adoption of Cloudflare’s new offerings or are using more of its current services.

This metric compares the company’s revenue in a quarter to the revenue from the same customer cohort in the year-ago period, so a reading of more than 100% means that it has managed to win a bigger share of the wallets of its existing customers. Throw in the additional revenue opportunities that are likely to open up thanks to the company’s growing portfolio of AI offerings, and there is a good chance that Cloudflare will maintain its robust growth in the long run as well.

As it turns out, analysts expect Cloudflare’s earnings to increase at an annual rate of 62% for the next five years. That’s why investors looking to add a growth stock to their portfolios would do well to buy Cloudflare before it steps on the gas following a flat performance on the market so far in 2024.

Should you invest $1,000 in Cloudflare right now?

Before you buy stock in Cloudflare, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Cloudflare wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, Nvidia, Oracle, and Palantir Technologies. The Motley Fool has a disclosure policy.

Artificial Intelligence (AI) Spending Is Set to Hit $631 Billion in 2028: 1 Magnificent Stock to Buy Right Now Before That Happens was originally published by The Motley Fool

Talking yourself into buying stocks priced at highs isn’t easy. It’s even tougher when a stock is outright soaring. The risk of an imminent correction just feels too great.

Sometimes, though, the reason for a rally — and the odds of it continuing — are bigger than the risk. To this end, here’s a closer look at three soaring stocks I’d buy without a second thought. There’s still more than enough upside potential on the table to justify taking a swing at their lofty levels.

1. Costco Wholesale

If membership-based retailer Costco Wholesale (NASDAQ: COST) has an effective limit to its reach, it’s nowhere in sight. The company now boasts 76.2 million paid memberships, providing 136.8 million total cardholders the right to enter its stores, up 7.3% year over year for the three-month stretch ending in early September. That’s yet another record.

Granted, the penetration of new markets helped. In addition to opening 10 new stores in the United States during the quarter in question, it opened another four outside the U.S. There’s no slowdown on the horizon, either. Costco plans on opening 26 new locales in the fiscal year that just got underway, pushing its count up to 916 stores. About half of these openings will be overseas.

Being able to deliver real value here and abroad, however, is the biggest driver of this growth.

People all over the developed world are becoming more cost-effective shoppers. A poll performed by YouGov last year indicates that in the wake of soaring inflation, 94% of the planet’s consumers made a point of employing money-saving tactics when making purchases. More price comparisons and couponing were the most-newly embraced approaches, but switching stores as well as switching brands were popular strategies as well. Given that costs of discretionary goods as well as consumer staples have only grown since then, the sentiment certainly still applies.

It’s a dynamic that plays right into the hand Costco is holding. While buying in bulk hasn’t always been everyone’s preferred method of shopping for basic goods, when budgets are stretched as tightly as they are now — and likely will be for the foreseeable future — consumers are willing to adapt.

That’s what the analyst community appears to believe, anyway. They’re expecting Costco Wholesale’s top line to grow by more than 7% this fiscal year, and improve by nearly as much again next year. This is the key reason Costco shares are just off of record highs hit in early September.

2. Toast

The restaurant business is not only wildly competitive, but incredibly complicated. Restaurant managers routinely deal with short-lived employees, constantly depleted supplies, regulatory inspections, and (hopefully) a steady flow of new customers. In the midst of the madness, they’re also supposed to improve and grow their restaurant’s revenue. It’s a lot to tackle!

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A company called Toast (NYSE: TOST) makes it all at least a little easier to manage.

In simplest terms, Toast offers software built from the ground up to specifically serve the restaurant industry. From point-of-sale solutions to online ordering to payroll to marketing, Toast can handle it all. These tools are all integrated into a singular platform, too, making it easy and fast to use them all.

And to date, 120,000 different restaurants are utilizing the Toast platform. For perspective, there are over 700,000 restaurants in the United States alone. Clearly there’s a multitude more outside the U.S., which are just as addressable by Toast as domestic restaurants are.

Restaurants are signing up in droves, too. Toast’s top line improved 27% during the second quarter of this year, extending growth trends that are likely to persist at least for a few more years. At its current growth trajectory, the company’s expected to swing to a full-year profit in 2025 — one of the reasons shares recently reached a new 52-week high, more than doubling its value in less than a year.

But it’s a business model with a limited lifespan? Not so fast.

Toast’s software is rented rather than outright purchased. Its customers are gladly willing to pay this ongoing fee, however, since it provides them with a constantly updated cloud-based platform that meets their unique business needs. Toast is very much a partner with its customers, growing its top and bottom lines as restaurants themselves grow theirs.

3. Apple

Last but not least, add Apple (NASDAQ: AAPL) to your list of soaring stocks to buy. Like Costco, it recently reached a record high, and is up more than 300% for the past five years.

There’s arguably more upside in store dead ahead, though.

Yes, this call has everything to do with the recent launch of the iPhone 16 that’s capable of handling generative artificial intelligence (AI) functions directly from the device itself (as opposed to punting this work to the cloud, which is where most of it is currently handled). While some concern has been raised about the tepid initial demand for the latest iteration of the popular smartphone, that doesn’t eliminate the prospect of a so-called supercycle eventually whipping up some serious demand for the device.

It could just take some time for consumers to come around; they may be waiting for the early reviews of the tech. Indeed, the software that turns the latest iPhones into full-blown artificial intelligence devices isn’t even available yet, and even once it is, the rollout will be gradual in terms of features as well as regions. All this means there’s no particular hurry to purchase new iPhones just yet, if AI is the motivating force.

There’s also no doubt that consumer interest in such a tool is real. Technology market research outfit IDC anticipates worldwide sales of more than 230 million generative AI-capable smartphones this year alone, en route to over 900 million such devices in 2028, when this tech will be the norm.

Given Apple’s brand notoriety, it’s arguably better positioned than any other player to capture more than its fair share of this growth.

More (along with more engaged) iPhone owners of course means sales of more apps, streaming music, and streaming video from Apple’s app store. This in turn translates into more services revenue, which at more than 70% boasts considerably higher gross profit margin rates than the 37% gross profit margin rate on sales of iPhones, iPads, and Mac computers.

Should you invest $1,000 in Costco Wholesale right now?

Before you buy stock in Costco Wholesale, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $752,838!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Costco Wholesale, and Toast. The Motley Fool has a disclosure policy.

3 Soaring Stocks I’d Buy Now With No Hesitation was originally published by The Motley Fool