According to McKinsey & Company, 72% of organizations worldwide have adopted artificial intelligence (AI) in at least one business function. That's up from 50% just two years ago, which highlights how quickly this technology is spreading throughout the corporate sector.
Many key service providers, like cybersecurity vendors and cloud computing platforms, have also integrated AI extensively to help them serve their business customers more effectively. Palo Alto Networks(NASDAQ: PANW) and Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) are two great examples.
Both companies are leaning heavily on AI to reduce costs, deliver better products, and create new opportunities to generate revenue. Here's why investors with a spare $600 might want to use it to buy one share in Palo Alto Networks and one share in Alphabet.
Image source: Getty Images.
1. Palo Alto Networks: A leader in AI-powered cybersecurity
Palo Alto Networks is the largest cybersecurity company in the world. Its product portfolio is spread across three core platforms: cloud security, network security, and security operations, and it's integrating AI into each of them to deliver fast, accurate, and automated protection for businesses.
The company launched an AI-powered security operations solution called Cortex XSIAM around two years ago. It allows organizations to automate incident response and remediation, and Palo Alto says half of the customers using XSIAM have already reduced their median time to resolution (MTTR) to under 10 minutes, from several days previously.
During fiscal 2024 (ended July 31), XSIAM's customer base soared fourfold from the prior year and bookings more than doubled to $500 million. Those results really emphasize how quickly demand is growing for automated, AI-powered cybersecurity solutions.
Palo Alto is also rolling out new products to protect organizations that are deploying AI. Customers of its Prisma Access network security platform can now switch on a new tool called AI Access Security, which assigns a risk score to third-party AI applications (like OpenAI's ChatGPT). It ensures employees are deploying those apps safely, and it allows managers to completely block certain AI programs if they pose a threat.
The cybersecurity industry has a history of fragmentation. Providers often specialized in specific products, so businesses had to piece together their security stack from multiple vendors. Palo Alto is driving a shift toward "platformization," meaning it wants to be the one-stop shop for every cybersecurity requirement within an organization. Why? Because customers who use all three of its platforms have a lifetime value that is 40 times higher than those using just one.
To entice customers to ditch their existing providers, Palo Alto is offering them fee-free periods for its products, which is driving a temporary slowdown in its overall revenue growth. The company generated $8 billion in total revenue in fiscal 2024, which was an increase of just 16% from fiscal 2023 -- much slower than the 25% growth it delivered in that prior year.
But there's a powerful trend beneath the surface that proves it's paying off. Palo Alto's annual recurring revenue from its next-generation security (platformization) customers soared 43% to $4.2 billion in the final quarter of fiscal 2024. The company believes that number will more than triple to $15 billion by 2030, as it expects 3,500 of its top 5,000 customers to take a platform approach to cybersecurity by then.
Palo Alto stock is trading near a record high, but with that kind of potential growth in the pipeline, it could be a fantastic buy for the long term.
Image source: Alphabet.
2. Alphabet: Developing AI on several fronts
Around a year ago, investors were concerned Alphabet was lagging behind start-ups like OpenAI in the AI race. However, the tech conglomerate is now at the front of the pack, deploying unique AI solutions across Google Search, Google Cloud, and even self-driving vehicle subsidiary Waymo.
Google Cloud provides a portfolio of services to help businesses deploy AI. It offers data center infrastructure powered by Nvidia's graphics processing chips (GPUs), which developers can use to build their own AI models. Alphabet even designed its own chips to differentiate itself from other cloud providers. It recently launched its sixth-generation tensor processing chip (TPU) called Trillium, which delivers nearly five times the peak computing performance of the previous generation, so the company is making rapid progress.
Developers can also access more than 130 ready-made large language models (LLMs) through Google Cloud, which they can use to accelerate the creation of functional AI software applications like chat bots and virtual assistants. Those models include the Gemini lineup that Alphabet developed in-house.
Google Cloud was Alphabet's fastest-growing segment in the second quarter of 2024 (ended June 30). It generated a record $10.3 billion in revenue, which was up 29% from the year-ago period. That growth could accelerate as AI adoption continues to expand throughout the corporate sector.
Google Search, however, remains the conglomerate's largest source of revenue. It's receiving an AI overhaul of its own with a new feature called AI Overviews, which uses text, images, and links to third-party websites to deliver a complete response to queries. In other words, Overviews will save users from sifting through web pages to find answers to their questions, which is a typical (and sometimes bothersome) part of the traditional Google Search experience.
Alphabet has already said that links embedded within Overviews receive more clicks compared to the same links in traditional Google Search results, so this AI feature could become a significant driver of advertising revenue in the future. But for users who prefer a pure chatbot experience (like ChatGPT offers), Alphabet's Gemini is also available in that format.
Alphabet stock trades at a price-to-earnings (P/E) ratio of just 23.4 right now, meaning it's cheaper than every other big-tech giant with a valuation of $1 trillion or more. The company is facing regulatory issues that could result in a break up of the entire organization, and that is making investors nervous. But prominent Wall Street analysts think that's an unlikely, worst-case outcome, and it's going to take years to play out in court, regardless.
Therefore, Alphabet's AI projects are likely to move full steam ahead for the foreseeable future, and that makes its stock incredibly attractive at the current price.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palo Alto Networks. The Motley Fool has a disclosure policy.
