The financial world is abuzz with anticipation as the S&P 500 teeters on the cusp of a bull market, having delivered an average return of 285% in the last five bull runs. Artificial intelligence (AI), a groundbreaking technology, is poised to play a pivotal role in the upcoming surge. Predictions suggest that AI software sales will grow by a remarkable 23% annually, reaching a staggering $1.1 trillion by 2032. In this article, we explore two exceptional AI growth stocks that investors should consider for the long haul.
HubSpot: A CRM suite evolution driven by AI
HubSpot (NYSE: HUBS) serves as a shining example of the power of continuous innovation. Starting as a single marketing application, it has since evolved into a comprehensive Customer Relationship Management (CRM) suite. Today, HubSpot’s platform encompasses productivity software for sales, service, marketing, and operations teams, alongside solutions for content management and commerce. These integrated tools empower businesses to delight customers at every touchpoint.
HubSpot vs. Salesforce
In the vast CRM landscape, Salesforce reigns supreme, but HubSpot has carved its niche as a CRM leader among small businesses. This achievement was made possible through a combination of freemium pricing and an unwavering commitment to internal innovation. Unlike Salesforce, which relied heavily on acquisitions to build its CRM platform, HubSpot created a suite of seamlessly integrated, user-friendly software solutions through in-house development.
HubSpot’s performance in the third quarter remained robust despite ongoing macroeconomic challenges. The company’s customer count surged by 23% year over year to 184,900, while average subscription revenue per customer increased by 2%. Consequently, revenue soared by 25% year over year to $529 million, and non-GAAP earnings skyrocketed by an impressive 205% to $1.34 per diluted share. Investors have compelling reasons to believe that this momentum will endure.
AI at the core
HubSpot is not just a player in the AI space; it’s a market leader in AI sales assistant software. Recently, the company announced a slew of new AI products designed to automate workflows across its CRM platform. These products include generative AI tools capable of creating marketing campaigns, social media content, and entire websites in response to natural language prompts. Expected to reach general availability next year, these innovations have already earned HubSpot recognition as a top pick among AI stocks by Bank of America.
HubSpot has identified its addressable market to be worth $77 billion by 2028, indicating substantial upside for investors. Moreover, with shares currently trading at 13.5 times sales, a discount compared to the three-year average of 17.3 times sales, the current juncture presents an opportune moment to invest in this growth stock.
Arista networks leads the AI-driven networking revolution
Arista Networks (NYSE: ANET) specializes in providing high-speed networking equipment and software tailored for cloud and enterprise data centers. Their switching and routing platforms boast industry-leading performance, a crucial attribute in the era of bandwidth-hungry AI software and cutting-edge technologies. Arista complements its hardware offerings with software solutions for network automation, monitoring, and security. But perhaps their most notable innovation is the Extensible Operating System (EOS).
The EOS advantage
EOS represents a single, unified software that operates across all Arista hardware, across all environments. This enables clients to deploy a seamless network that interconnects public clouds, private data centers, and enterprise campus workspaces. This unified approach sets Arista apart from legacy vendors that rely on multiple operating systems, a strategy that tends to complicate network management and inflate costs.
Arista has seized the throne as the gold standard in high-speed data center switches, unseating the once-dominant Cisco Systems. Arista’s market share swelled to 47% in the first quarter of 2023, a significant increase from 36% during the same period the previous year. Meanwhile, Cisco’s market share contracted by approximately 300 basis points to 21%.
Solid financial performance and AI workloads
Arista’s financial report for the second quarter testified to its strength, with revenue surging by 39% year over year to $1.5 billion and GAAP net income experiencing a remarkable 65% increase to $1.55 per diluted share. While hardware sales can be cyclical, Arista currently enjoys a prosperous period. Morgan Stanley analysts anticipate a 16% annual increase in cloud networking spending driven by AI workloads over the next four years. They believe that Arista, with its current market presence, is optimally positioned to benefit from this tailwind.
Valuation and investment opportunity
Shares of Arista Networks currently trade at 36.2 times earnings, indicating that it is not a bargain investment by any means. However, this valuation is consistent with the three-year average, providing investors with confidence in considering a small position in this growth stock. Should shares experience a significant pullback in the future, it might present an even more compelling buying opportunity.
As the S&P 500 flirts with bull market territory, the potential for substantial returns beckons. The prominence of AI in the impending bull market cannot be overstated, with AI software sales predicted to skyrocket. HubSpot and Arista Networks, two remarkable AI growth stocks, are well-poised to thrive in this landscape. Their innovative strategies and strong market positions make them enticing long-term investment options for astute investors looking to ride the wave of AI-driven growth.
