Three full months remain in 2024, but it has been a spectacular year for investors so far. The benchmark S&P 500 index is up almost 21%, which trounces its average annual return of 10.5% going back to when it was established in 1957.
Artificial intelligence (AI) was the dominant theme in the market throughout 2023, and that carried into 2024 in a very big way with a growing number of companies adopting the technology. That trend is likely to continue, which is why investors should consider buying AI stocks ahead of 2025.
Here's why CrowdStrike (NASDAQ: CRWD) and Spotify Technology (NYSE: SPOT) might be two great options.
1. CrowdStrike: 2025 could be a bounce-back year
CrowdStrike is a leader in the cybersecurity industry. However, on July 19, the company pushed a corrupted software update that crashed more than 8.5 million customer computers, costing some of its largest clients an estimated $5.4 billion. It sent CrowdStrike stock plunging by 36% at its low point, but recent comments by CEO George Kurtz suggest the fallout might be less severe than investors expected.
The cybersecurity industry has a history of fragmentation, which means businesses had to buy different products from different vendors to complete their security stack. CrowdStrike's flagship Falcon platform, however, is one of the only complete services on the market for enterprises. It protects cloud networks, employee identities, endpoints, and more, with AI at its core to power automated threat hunting and incident response.
CrowdStrike's AI models are trained on more than 2 trillion security events every day, so they constantly improve over time. The company also launched a virtual assistant called Charlotte AI last year, which is embedded into the Falcon platform. It can autonomously produce incident summaries, which cuts down on manual investigative work, and it can also be prompted to hunt for new threats at any time. Such features allow Charlotte AI to save users an estimated two hours per day, on average.
Businesses can select from 28 cybersecurity modules (products) on the Falcon platform, and during its fiscal 2025 second quarter (ended July 31), CrowdStrike said 65% of customers were using at least five. Plus, the number of deals signed for eight or more modules soared 66% year over year, which is where spending really ramps up.
During the Q2 conference call with investors, Kurtz said the July 19 incident would result in many future contracts being delayed, but the vast majority still remain in the pipeline (which means they haven't been canceled). CrowdStrike stock has steadily climbed since those comments and it hit $299 as of the close on Friday, Sept. 20, which is the highest point since the outage.
The company ended Q2 with $3.8 billion in annual recurring revenue, but management reiterated its plan to reach $10 billion over the next seven years. With the stock still trading 23% below its all-time high, now could be a great time for investors to buy ahead of what could be a strong bounce-back next year.
2. Spotify: The road to 1 billion users
Spotify is the world's largest music streaming platform with an estimated market share of 31.7%, according to Statista. Tencent Music is in a distant second place with a market share of just 14.4%. The majority of music streaming platforms offer very similar content catalogs, so they can only differentiate their service through pricing, technological features, and by offering other content.
Spotify is arguably the industry's leading innovator. It has deployed AI-powered algorithms in its recommendation engine for years to ensure users see the most relevant content to keep them engaged, but the company has also rolled out a number of new AI features lately. Its AI DJ learns what each individual user likes and compiles personalized playlists, complete with commentary during playback from a software-generated voiceover. Similarly, Spotify's new AI Playlist tool allows users to type in prompts (referencing emotions or even a place) to generate a unique list of tracks.
The company is also experimenting with AI on its advertising platform. It recently launched a new tool called Quick Audio, which allows businesses to rapidly generate scripts and voiceovers for their ads, saving them significant time and money in the creative process.
During its 2024 second quarter, Spotify had 626 million monthly active users, a 14% increase from the year-ago period. It had 246 million Premium users who pay a monthly subscription, which was 1 million above management's forecast (the rest were free users who are monetized through advertising). Premium subscribers are important because they contribute around 88% of Spotify's total revenue.
According to Wall Street's consensus estimate, Spotify is on track to generate $17.6 billion in revenue for the whole of 2024. But the company is eyeing some ambitious long-term goals. It wants to grow its monthly active user base to 1 billion by 2030, which could lead to a whopping $100 billion in annual revenue around two years after that.
Spotify increased its subscription prices last year, and it rolled out another hike in most major markets a few months ago. Each of its paying subscribers will be far more valuable by the end of the decade if that trend continues. Plus, further innovations on its advertising platform could result in Spotify becoming a more attractive destination for businesses seeking to reach potential customers, which will make each of its free users more valuable over time.
Spotify stock is currently trading in line with its all-time high from 2021, but its price-to-sales ratio is just 4.7, which is 28% below its peak of 6.5 (because the company has grown its revenue significantly since 2021). Considering its long-term forecasts, the stock still has upside potential heading into next year and beyond.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Spotify Technology, and Tencent. The Motley Fool has a disclosure policy.
