2 Great Artificial Intelligence (AI) Stocks to Buy Instead

By | March 4, 2024

Put aside Nvidia is practically impossible, as almost every major tech company in America seems to be rushing to acquire its data center chips designed to handle artificial intelligence (AI) workloads. Moreover, Nvidia shares were the best performers in the S&P500 index in 2023 with a gain of 239%, and is already up another 61% in 2024.

But the AI ​​industry is expanding rapidly and some other opportunities deserve attention, so let’s forget about Nvidia for a moment.

Palo Alto Networks (NASDAQ: PANW) is the world’s largest cybersecurity company, applying AI across its product portfolio to provide advanced protection against modern threats. DigitalOcean (NYSE: DOCN)on the other, is an under-the-radar cloud services provider emerging as a stepping stone to the AI ​​revolution for small and medium businesses.

This is why investors would do well to buy both stocks now.

1. Palo Alto Networks

Cyber ​​threats are a growing problem in the business world. Data breaches not only have serious financial consequences, but also damage the trust between companies and their customers. Attacks are becoming more sophisticated every year, and malicious actors are even using tools like generative AI to trick employees into handing over sensitive information through realistic phishing emails and phone calls.

Automation has never been more important for cybersecurity, because it is impossible to train every employee within an organization to be an expert. Palo Alto Networks says 93% of security centers still rely on manual, human-led processes, and the workload is so heavy that 23% of security incidents go uninvestigated. This creates enormous vulnerabilities.

Palo Alto offers three cybersecurity platforms that focus on cloud security, network security and security operations. It weaves AI into them all, including the new Cortex XSIAM product for security operations. For one customer, it resolves up to 90% of security incidents autonomously, without the need for human intervention. XSIAM was released just over a year ago and has already built a sales pipeline worth $1 billion.

Palo Alto is the largest cybersecurity company in the world and plans to use that scale to crush its competitors. Many large organizations use cybersecurity tools from multiple vendors based on their needs, but Palo Alto wants its customers to move away from competing products and use its products exclusively.

To achieve this, Palo Alto will offer customers long no-fee periods so they can integrate the software at no cost, which should encourage them to switch once their contracts with competing providers expire. A customer using all three of Palo Alto’s platforms gets a lifetime value that is 40 times greater than a customer using just one platform, so this could deliver significant long-term growth.

On the downside, this strategy will lead to a short-term dip in Palo Alto’s revenue and billing growth. That’s why the shares have recently suffered a sharp decline and are now trading 16% below their all-time highs. Nevertheless, the company still forecasts record sales of up to $8 billion in fiscal 2024 (ending July 31).

Therefore, the dip in the stock price could be a good starting point for long-term investors. Once Palo Alto begins to reap the benefits of its strategy, it could enter a new phase of growth.

2. DigitalOcean

The largest cloud platforms in the world, such as Amazon Web services and Microsoft Azure is spending billions of dollars to build data centers for AI development, mainly using chips from Nvidia. While focusing on serving large organizations and wealthy AI developers, DigitalOcean ensures that small and medium businesses are not left behind.

DigitalOcean is a provider of cloud services that allow these companies to store data, host websites and develop software. It offers cheap and transparent pricing, highly personalized service and mountains of educational materials to help customers maximize their output. It is an ideal platform for startups and companies with fewer than 500 employees that cannot afford in-house technical teams to manage their cloud infrastructure.

Last year, DigitalOcean spent $111 million to acquire Paperspace, a data center operator focused on providing AI infrastructure at affordable prices. It offers the latest graphics processing units (GPUs) – including Nvidia’s industry-leading H100 – up to 70% cheaper than Microsoft Azure. Paperspace charges customers per second with no lock-in contracts, and its limited business model allows the company to maintain a lean cost structure compared to the cloud giants. These features lead to lower prices for the end user.

DigitalOcean estimates that its opportunity in the small and medium business cloud services sector will be worth $114 billion by 2024, which could rise to $213 billion by 2027. However, AI could dramatically expand that addressable market to trillions of dollars, with Wall Street predicting the technology could add between $7 trillion and $200 trillion to the global economy over the next decade.

DigitalOcean could soon become the go-to platform for these companies looking to gain access to AI. At the end of 2023, the company had just $730 million in annual recurring revenue, so it has barely scratched the surface of its addressable market, let alone the AI ​​capability.

DigitalOcean stock remains 71% below its all-time high, which was set during the tech frenzy of 2021. Its valuation was a bit unrealistic at the time, but the steep drop could provide investors with a great long-term entry point.

Should You Invest $1,000 in Palo Alto Networks Now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, DigitalOcean, Microsoft, Nvidia, and Palo Alto Networks. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Forget Nvidia: 2 Great Artificial Intelligence (AI) Stocks to Buy Instead was originally published by The Motley Fool

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