According to McKinsey & Company, 72% of organizations worldwide have implemented artificial intelligence (AI) in at least one business function. That’s up from 50% just two years ago, highlighting how quickly this technology is spreading throughout the business sector.
Many major service providers, such as cybersecurity and cloud computing platform providers, have also extensively integrated AI to help them serve their enterprise customers more effectively. Palo Alto Networks (PANW 0.14%) And Alphabet (GOOG 0.33%) (GOOGL 0.30%) are two nice examples.
Both companies rely heavily on AI to reduce costs, deliver better products and create new revenue generation opportunities. This is why investors with an extra $600 might want to use it to buy one share of Palo Alto Networks and one share of 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. The product portfolio is spread across three core platforms: cloud security, network security and security operations, and integrates AI into each of these platforms to provide businesses with fast, accurate and automated protection.
The company launched an AI-powered security operations solution called Cortex XSIAM about two years ago. It enables organizations to automate incident response and recovery, and Palo Alto says half of customers using XSIAM have already reduced their median time to resolution (MTTR) to less than 10 minutes, compared to just days earlier .
During fiscal year 2024 (ending July 31), XSIAM’s customer base quadrupled from the previous year and bookings more than doubled to $500 million. These results really highlight how quickly demand is growing for automated, AI-powered cybersecurity solutions.
Palo Alto is also introducing new products to protect organizations that deploy AI. Customers of the Prisma Access network security platform can now enable a new tool called AI Access Security, which assigns a risk score to third-party AI applications (such as OpenAI’s ChatGPT). It ensures employees use these apps safely and 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, requiring companies to build their security stack from multiple vendors. Palo Alto is driving a shift toward “platformization,” meaning it aims to be the one-stop shop for every cybersecurity requirement within an organization. Why? Because customers who use all three platforms have a lifetime value that is 40 times higher than that of customers who use just one platform.
To entice customers to leave their existing providers, Palo Alto is offering them free periods on its products, causing a temporary slowdown in overall revenue growth. The company generated total revenue of $8 billion in fiscal 2024, which was an increase of just 16% from fiscal 2023 – much slower than the 25% growth in the previous year.
But there’s a powerful trend lurking beneath the surface that’s proving it’s paying off. Palo Alto’s annual recurring revenue from its next-generation security (platformization) customers rose 43% to $4.2 billion in the final quarter of fiscal 2024. The company believes this number will grow comfortably. triple to $15 billion by 2030, as it expects 3,500 of its top 5,000 customers to adopt a platform approach to cybersecurity by then.
Palo Alto stock is trading near an all-time high, but with that kind of potential growth in the pipeline, it could be a fantastic long-term buy.
Image source: Alphabet.
2. Alphabet: Developing AI on multiple fronts
About a year ago, investors were concerned that Alphabet was lagging behind startups like OpenAI in the AI race. However, the tech conglomerate is now leading the way, deploying unique AI solutions through Google Search, Google Cloud, and even self-driving subsidiary Waymo.
Google Cloud offers a portfolio of services to help companies implement AI. It provides data center infrastructure powered by Nvidia‘s graphics processing chips (GPUs), which developers can use to build their own AI models. Alphabet has even designed its own chips to differentiate itself from other cloud providers. The company recently launched its sixth-generation tensor processing chip (TPU), called Trillium, which delivers nearly five times the maximum computing performance of the previous generation, so the company is making rapid progress.
Developers can also access more than 130 ready-to-use large language models (LLMs) through Google Cloud, which they can use to accelerate the creation of functional AI software applications such as chatbots and virtual assistants. These models include the Gemini series that Alphabet developed in-house.
Google Cloud was Alphabet’s fastest growing segment in the second quarter of 2024 (ended June 30). It generated record revenue of $10.3 billion, up 29% from the same period last year. That growth could accelerate as AI adoption continues to expand in the enterprise sector.
However, Google Search remains the conglomerate’s largest source of revenue. It’s getting its own AI overhaul with a new feature called AI Overviews, which uses text, images and links to third-party websites to provide complete answers to questions. In other words: Overviews will prevent users from crawling through web pages to find answers to their questions, which is a typical (and sometimes annoying) part of the traditional Google search experience.
Alphabet has already said that links embedded in Overviews receive more clicks compared to the same links in traditional Google search results, so this AI feature could become a major ad revenue driver in the future. But for users who prefer a pure chatbot experience (like ChatGPT offers), Alphabet’s Gemini is available in that format as well.
Alphabet’s stock currently trades at a price-to-earnings ratio of just 23.4, meaning it’s cheaper than every other major tech giant with a valuation of $1 trillion or more. The company is facing regulatory issues that could lead to the collapse of the entire organization, making investors nervous. But prominent Wall Street analysts think this is an unlikely, worst-case outcome, and one that won’t happen for a while years to play in court anyway.
Therefore, Alphabet’s AI projects are likely to be full steam ahead for the foreseeable future, and that makes the stock incredibly attractive at its current price.
