Cathy Wood’s Arc Invest is very bullish on artificial intelligence (AI), especially where software is concerned, as it promises to deliver massive increases in labor productivity. Arch analysts believe that automation can double the output of the average knowledge worker, and for that reason, they expect AI software revenue to grow 42% annually to $14 trillion by 2030.
As that tailwind takes shape, many companies will benefit, however Salesforce (CRM 0.24%) And Trade Desk (TTD 3.15%) Their current valuation looks attractive. Here’s why these are great growth stocks to buy.
Salesforce is the gold standard in customer relationship management (CRM) software. Its platform improves collaboration and productivity across marketing, commerce, sales and service teams, which ultimately helps businesses win customers and retain their loyalty over time. That value proposition is relevant for most companies in most industries.
Indeed, CRM software is one of the two largest verticals in the broad enterprise software-as-a-service market, the other being enterprise resource planning software. And Salesforce is the undisputed CRM market leader. Its platform accounted for 23% of CRM sales last year, more than the bottom four vendors, and Salesforce posted bigger revenue growth than any competitor.
That strength has spilled over into the current year, as evidenced by stellar second-quarter reports. Revenue rose 11% to $8.6 billion, and non-GAAP earnings rose 78% to $2.12 per diluted share. CEO Marc Benioff also said on the earnings call that Salesforce is now the third largest enterprise software company in the world.
Investors can confidently expect that momentum to continue, in part because CRM sales are projected to grow 14% annually through 2030, and in part because Salesforce is leaning into demand for artificial intelligence software. It recently announced several new products that automate various CRM workflows, detailed below:
- Sales GPT Increases sales team productivity by drafting emails, summarizing sales calls, and updating CRM platforms.
- Service GPT Increases service team efficiency by drafting responses to customer inquiries and summarizing interactions in CRM.
- Marketing GPT Enhances marketing campaigns with predictive insights and refining targeting parameters.
- Commerce GPT Improves commerce results by providing merchants with actionable insights and engaging buyers with personalized product descriptions.
Going forward, Salesforce should be able to grow revenue by roughly 14% annually (ie, in line with the broader CRM industry), though it could grow even faster if its AI products become a big hit. In any case, the current valuation of 6.6 times sales potential for revenue growth in the teens seems reasonable. Investors should feel comfortable buying a short position in this growth stock today.
2. Trade Desk
Trade Desk operates an advertising technology platform that helps clients create, measure and optimize data-driven campaigns across digital channels. Its software includes what management calls “industry-leading AI” that surfaces insights and tweaks targeting parameters to drive clicks and conversions for marketers.
A report published earlier this year by Quadrant Knowledge Solutions partially confirmed this assertion. The consultancy ranked The Trade Desk as the best ad technology platform on the market, citing unmatched technical excellence and deeper customer impact than other vendors. The latter point represents another important difference.
The trade desk is the largest Independent An advertising technology company. This means it does not own any web properties and therefore, has no reason to prioritize any particular inventory. Against this, the alphabet (GOOGL 0.40%) (GOOG 0.39%) Google owns search, YouTube and many other web properties, giving ad buyers a clear incentive to steer in that direction. Admittedly, adopting that strategy has benefited Alphabet greatly — but the cracks are starting to show and the trade desk is taking market share.
Those shares continued to gain in the second quarter. Revenue rose 23% to $464 million, easily topping the 3% ad revenue growth reported by Alphabet. The trade desk also generated $33 million in GAAP net income, up from a loss of $33 million in the prior year. CEO Jeff Green said on the earnings call: “Our relative performance over the past few quarters means we’ve gained more market share than any other period in our company’s history.”
Looking ahead, ad tech sales are projected to grow 14% annually through 2030. However, Trade Desk’s technological excellence and independent business model, which is clearly resonating with media buyers, should enable it to grow faster. This makes its current valuation of 24.8 times sales look reasonable, especially when the three-year average is 29.9 times sales. Investors should buy a short position in this bullish stock today and selectively add more shares during the correction.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Trevor Jenwine holds positions in the trade desk. The Motley Fool recommends Alphabet, Salesforce, and The Trade Desk. Motley Fool has a disclosure policy.