Are you losing patience with the never-ending artificial intelligence (AI) chatter yet? Don't worry -- there are still tech stocks poised for explosive growth beyond the AI hype.
Monolithic Power Systems(NASDAQ: MPWR), Pure Storage(NYSE: PSTG), and Sea Limited(NYSE: SE) are three companies innovating in power management chips, high-speed cloud storage, and digital commerce in Southeast Asia. Read on to see how these tech leaders offer robust growth potential and deserve a spot on any investment radar -- with just a light dash of AI exposure.
AI is great, but there's so much more to this top stock
Nicholas Rossolillo (Monolithic Power): Monolithic Power is a fabless (it outsources manufacturing) power chip designer. Its name is a nod to founder and CEO Michael Hsing's idea that an entire system of power delivery (all the components used to conduct electricity in an electrical device) could be shrunk down to one chip (thus the "monolithic" moniker).
And as time has gone by, Monolithic is relentless in its drive to keep consolidating power delivery onto those chips, and shrinking those chips down in size. Suffice it to say it's been a winning formula for investors for a long time, as you can see in the chart below.
Data by YCharts.
Monolithic designs power chips and systems for all sorts of applications. However, many of its customers -- especially those in automotive, manufacturing, and communications infrastructure -- are in the midst of a slump. Hsing and the top team are optimistic that these markets will begin to stabilize in the second half of 2024.
In the meantime, Monolithic's "Enterprise Data" segment is skyrocketing. Sales jumped 217% year over year, thanks in no small part to data center servers that support AI and other accelerated computing applications. At $150 million in revenue in Q1 2024, these data center and enterprise compute power chips made up one-third of Monolithic's total sales.
This could make Monolithic a secret bet on the development of AI, especially as data center operators are looking for ways to save money on the power consumption of AI systems like those Nvidia is selling in droves. And of course, Monolithic's other industrial power segments stabilizing would be a nice help.
Shares trade for a premium of over 50 times expected 2024 earnings per share, so the market already has lofty expectations for this chip designer. But as it has proven for years now, Monolithic power chips are in high demand, and helping customers drive down the cost of operating all sorts of tech. Keep this one on your radar at the very least.
Innovative cloud storage solutions for the win
Anders Bylund (Pure Storage): Data storage in the cloud is starting to sound like an old-school business idea, but Pure Storage brings some fresh innovation to this space. The company focuses on all-flash storage solutions with advanced management software that leaves traditional disk-based systems in the dust.
Pure Storage's innovative strategy centers around software-defined storage. It's like running virtual computers in the cloud with a specific focus on data management. The platform is deeply integrated with a variety of cloud computing services, including the option to work with the client's own data centers.
Satisfied customers often highlight the space-saving benefits of Pure Storage's data solutions. In one recent case study, the city of Bloomington, Illinois, reduced its in-house storage from 48 rack units to seven. The offsite Pure Storage is faster than the old hard drives, gives the IT team access to critical data from anywhere in the world, and brings the option to expand the storage space at the click of a mouse.
In another case study, an entertainment industry pension plan moved from 44 rack units of local storage to two, resulting in significant savings on power and cooling costs. And of course, the Pure Storage solution is faster and more flexible. In particular, the California-based organization's disaster recovery process became simpler and 10 times faster.
Pure Storage isn't a direct play on the AI boom, but it does benefit from the rise of AI and machine learning. The need for speedy, reliable storage has never been greater. In a broader sense, Pure Storage helps its customers modernize their data storage systems.
This isn't the only name in cloud-based storage, but Pure Storage consistently outshines expectations despite fierce competition. Bottom-line earnings haven't missed a consensus analyst target since 2019.
Market makers are catching on to Pure Storage's seemingly unstoppable success. The stock has gained 150% over the last year, but still looks affordable at 32 times forward earnings, or 6.8 times trailing sales. No, it's not a slam-dunk bargain. However, there's nothing wrong with buying a top-quality company at a reasonable stock price, and that's what Pure Storage gives you today.
As companies continue to grapple with the explosion of data, Pure Storage's innovative solutions and strong market position should drive substantial long-term growth. When the AI boom fades out, there will still be a widespread need for larger, faster, safer, and more manageable data storage solutions. If you're not ready to buy Pure Storage shares right now, you should at least be ready to pounce on potential price drops.
Southeast Asia's biggest super-app finds its stride
Billy Duberstein(Sea Limited): Southeast Asia's Sea Limited has been through some extremely choppy waters over the past five years. But things are now looking up.
After going public in 2017, the gaming, e-commerce, and fintech super-app became a pandemic stock darling, surging into the high-$300 range as the company achieved hypergrowth during that period -- though garnering steep losses in the process.
Then in the post-pandemic era, revenue growth slowed and the company's premier mobile game megahit Free Fire saw a big decline in users just as interest rates rose, punishing loss-making stocks. But management impressively pivoted by slashing marketing costs and raising its e-commerce take rates to post surprise profitability in early 2023.
But then, even that pivot was again spoiled by the influx of competition from China social media behemoth TikTok, which aimed to set up its own livestreaming e-commerce empire in Sea's home base in Southeast Asia last year. The result? Sea's stock falling into the mid-$30 range, down over 90% from their highs.
However, Sea's management team has pivoted impressively again, investing prudently in livestreaming to counter the TikTok threat while flexing its competitive advantage in delivery and logistics. Last quarter, Sea rolled out an "on-time guarantee" and delivered 70% of packages within three days in Southeast Asia -- a difficult geography in which to pull that off.
And the company noted that after the pivot to investing in livestreaming about a year ago that Sea's Shopee e-commerce platform had become the largest live-streaming e-commerce platform in Indonesia, which is the largest market in Southeast Asia.
Even more encouraging? The company's digital entertainment segment, which is still Sea's main profit center, returned to growth in a big way last quarter. Bookings jumped almost 11%, while the percentage of users who paid for skins and other digital items reached 8.2%, up from 7.7% a year ago.
While some feared the company's hit game Free Fire, which debuted in 2017, was past its prime, management said monthly active users actually reaccelerated by 24%. This was thanks to new game features that Sea adds to the franchise on a regular basis, including the new "Chaos" and "Mechadrake" modes introduced in January and April. The user acceleration on the back of new updates and a recovering economy signaled Free Fire's potential to be a long-term "evergreen" royalty stream for Sea.
After going through loss-making hypergrowth, then a profitable but low-growth mode, Sea has now seemingly found a nice balance of growth, profitability, and defending its market share. In the recently completed quarter, all three segments grew with improved profitability. Shopee e-commerce grew 32.9%, and digital financial services grew 21%. While the digital entertainment division's revenue technically fell 17.8%, the division's bookings, which is a more accurate picture of underlying growth, rose 10.8%.
Meanwhile, all three divisions saw improving earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability on a quarter-over-quarter basis.
While the stock may not shoot right back up to the high $300s, and shares have basically doubled off their lows, they still remain 83% off their all-time highs. I'd expect a steady, measured march higher from here off a solid base of profitable growth.
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Anders Bylund has positions in Nvidia. Billy Duberstein has positions in Sea Limited. His clients may own shares of the companies mentioned. Nicholas Rossolillo has positions in Nvidia and Pure Storage. The Motley Fool has positions in and recommends Nvidia and Sea Limited. The Motley Fool recommends Pure Storage. The Motley Fool has a disclosure policy.
