/Development%20Environment%20Laptop.jpg)
Along with artificial intelligence (AI), “machine learning” has suddenly emerged as a phrase with a lot of buzz - and not just for investors. The concept of machine learning has become a central part of our daily lives, with applications in industries ranging from finance, healthcare, marketing, entertainment, and energy, among others.
Simply put, machine learning is a powerful AI tool that sifts through tons of historical data and assists software applications to make informed decisions for their users. And the growth prospects for the machine learning industry are stunning.
According to a report by Grand View Research, the size of the machine-learning market was a mere $3.9 billion in 2020. Consequently, behavioral changes due to the pandemic and surging demand for data-driven decisions have led to a whopping 13x jump in the machine learning market over the past three years to its current size of roughly $52.02 billion. Looking ahead, the market is expected to grow to a $419.94 billion by 2030, indicating a CAGR of nearly 35%.
While the growth potential in this market appears to be substantial, the broader tech sector has pulled back in August, and machine learning stocks are no exception. For investors looking to add some exposure to the industry, that means it's a good time to consider buying the dip. With that in mind, here's a look at three top stocks in the sector that analysts believe have plenty of upside potential from current levels.
Crowdstrike Holdings
Founded in 2011 and based out of Austin, Texas, Crowdstrike (CRWD) is a cloud-based cybersecurity company that provides endpoint protection, threat intelligence, and incident response services to its clients - which include Fortune 500 companies, as well as government agencies and educational institutions. The company's Falcon platform uses AI to detect and prevent threats and initiate responses, along with identifying user behavior. CRWD's current market cap stands at $36.49 billion.
Shares of the company have rallied 44% in 2023 so far, comfortably outperforming the Nasdaq 100 Index's ($IUXX) rise of 36%.
Crowdstrike topped analysts' earnings and revenue expectations with its first-quarter results, but the shares fell due to a slowdown in revenue growth. Revenues for the quarter ended April 30 came in at $692.6 million, up an impressive 42% from the prior year, and above the consensus estimate of $676.4 million. Growth in the key revenue segments of Subscription (+41.6% YoY) and Professional Services (+47.8% YoY) led to the overall rise in the top line. EPS almost doubled from the prior year to $0.57 from $0.31, compared to the consensus estimate of $0.51 per share.
Notably, the company has reported EPS growth consistently over the past five quarters, along with surpassing the consensus estimates on each of those occasions, too.
While net cash from operating activities for the first quarter came in at $300.9 million (up 40% YoY), free cash flow grew even faster, up 44.4% to $227.4 million. Plus, the company's long-term debt balance remained almost flat from the start of its fiscal year at $741.4 million (compared to $741 million as of Jan 31, 2023).
Crowdstrike is also making moves in the much-vaunted generative AI space. Most recently, the company has introduced powerful new generative AI applications, like Charlotte, to augment its existing offerings for enterprise cloud and cybersecurity customers.
Taking these developments into account, analysts are penciling in considerable earnings growth for the company, which is set to report its latest quarterly results next Wednesday, Aug. 30. Earnings growth is pegged at 94.5% in the current quarter, and Crowdstrike's bottom line is expected to grow by 118.2% for the fiscal year 2024.
Moreover, analysts are upbeat about the upside potential for Crowdstrike stock, attributing a “Strong Buy" rating with a mean target price of $179.62. This indicates upside potential of about 18% from current levels. Out of 39 analysts covering the stock, 33 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 4 have a “Hold” rating.
ServiceNow
Santa Clara, CA-based ServiceNow (NOW) is a cloud-driven IT services management company with a market cap of $113.01 billion. The company has a global enterprise customer base of more than 7,700, including almost 85% of the Fortune 500. ServiceNow harnesses the power of machine learning to predict future adverse IT-related outages or breakdowns, automate IT processes, and for data analysis to gather insights into IT operations.
Shares of the company are up 44% YTD, outpacing the Nasdaq 100.
ServiceNow reported strong numbers for the second quarter, as both revenue and earnings topped analysts' estimates. Revenues for the April-June period came in at $2.15 billion, up 23% from the previous year. EPS for the quarter arrived at $2.37, up 46.3% from the prior year and above the consensus estimate of $2.05. EPS has topped consensus estimates in each of the past five quarters, along with displaying year-over-year growth.
Operating cash flows were up to $580 million from the previous year's figure of $433 million, while the company generated free cash flows of $451 million in the second quarter, up an impressive 57.1% from the prior year. Further, net debt levels remained almost unchanged from the start of the year at $1.49 billion.
Meanwhile, current remaining performance obligations - a key metric which denotes the revenue that will be recognized in the next 12 months - stood at $7.2 billion at the end of the second quarter, up 25% from the prior year. The company also reported a 55% year-over-year increase in the number of customers with more than $20 million in average contract value.
Notably, ServiceNow made some moves in the generative AI space in the second quarter that deserve attention. The company inked a partnership with AI leader Nvidia (NVDA) to develop powerful generative AI solutions for its customers. Specifically, ServiceNow announced the AI Lighthouse Program with Nvidia and Accenture (ACN) to accelerate the adoption of generative AI capabilities for enterprises.
Taking note of these developments, analysts are forecasting impressive earnings growth for ServiceNow. In the current quarter, earnings growth is earmarked at 76%, resulting in FY 23 growth of 66.2%.
Overall, analysts remain upbeat about the prospects for ServiceNow, judging by the consensus “Strong Buy” rating and mean target price of $626 - indicating upside potential of nearly 12% from current levels. Out of 32 analysts covering the stock, 28 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 2 have a “Hold” rating.
SentinelOne
To round out our list, we have another cybersecurity company. Founded in 2013, California-based SentinelOne (S) offers a Singularity platform that makes use of machine learning extensively to detect cyber threats, analyze user behavior, and ensure risk assessment of systems. Recently, it's launched the Purple AI platform for enterprise customers to help address cyber threats autonomously and in real time. The company currently commands a market cap of $4.91 billion.
Shares of the company are up 11% on a YTD basis, underperforming the Nasdaq's gain in the same period. In fact, shares of SentinelOne were negative on the year before rocketing more than 16% yesterday amid media reports that the company is mulling a sale.
The stock sold off significantly after SentinelOne's first-quarter earnings report in June, thanks to a revenue miss and a weaker-than-expected forecast. In the first quarter ended April 30, SentinelOne reported quarterly revenues of $133.4 million, up 70.5% on a YoY basis - but still short of the consensus estimate for $136.6 million.
Notably, the company reported a loss per share of $0.15, narrower than its loss of $0.21 in the year-ago period and the consensus estimate for a loss of $0.17 per share. Moreover, losses have come in narrower than the consensus estimates in each of the past five quarters.
SentinelOne doesn't have any free cash flow to speak of, but its cash outflow from operating activities declined to $28.1 million from $49.4 million year over year.
Earnings growth projections for SentinelOne are a lot more modest than some other machine learning stocks. Analysts are expecting a 3.13% decline in earnings for the company in the current quarter, with results due next Thursday, Aug. 31. For fiscal 2024, Wall Street is looking for growth of just 3.15%.
Overall, analysts remain cautiously optimistic about the stock, with a consensus “Moderate Buy” rating and a mean target price of $18.48 - indicating upside potential of about 13% from current levels. Out of 26 analysts covering S, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 15 have a “Hold” rating.
Final Takeaway
Demand for machine learning applications looks set to expand significantly in the years ahead, particularly at the enterprise level. Names like Crowdstrike and ServiceNow, with well-established customer bases, healthy revenue growth and profitability, and consistent free cash flow, look like interesting stocks that still have room to run higher, according to analysts' projections.
However, with much less encouraging earnings to back it up, and so much of SentinelOne's share price driven by recent - and unconfirmed - buyout speculation, this looks like a much higher-risk machine learning stock at current levels (especially ahead of next week's quarterly report).
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
