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Generative Artificial Intelligence (AI) Revenue Is Soaring Toward $1 Trillion: 2 Top-Pick Growth Stocks to Buy Right Now

Motley Fool - Thu Nov 2, 2023

ChatGPT began dazzling the world with its latest generative artificial intelligence (AI) efforts roughly a year ago, laying the foundation for what promises to become a booming sector of the economy. Indeed, projections from Bloomberg Intelligence suggest that just generative AI-related revenue could compound at 42% annually over the next decade, reaching $1.3 trillion by 2032.

That rising tide will likely lift many companies, but certain Wall Street analysts see Datadog(NASDAQ: DDOG) and Docebo(NASDAQ: DCBO) as being especially well-positioned to benefit from the boom.

Here's what investors should know about these top-pick AI growth stocks.

1. Datadog

Datadog specializes in observability and cybersecurity software. Via turnkey integrations, its platform provides real-time visibility across the corporate IT stack, helping clients monitor and optimize their applications and infrastructure. Its platform also leans on artificial intelligence to automate various workflows and accelerate the resolution of performance problems.

Datadog offers nearly two dozen software modules and counting, giving it a distinct advantage over vendors with less robust product portfolios. Better yet, the company has earned a leadership position in several observability software markets -- including AI for IT operations, application performance monitoring, and log monitoring -- and it has a strong presence in many others.

Datadog delivered a solid financial performance in the most recent quarter. Its customer count climbed 23% to 26,100, and the average customer spent north of 20% more. In turn, revenue increased 25% to $510 million, and non-GAAP (adjusted) net income rose 50% to $125 million. Investors can expect similar momentum in the future.

Datadog values its addressable market at $62 billion in 2026, and the company is leaning into AI to capitalize on that opportunity. New platform integrations support end-to-end monitoring of the AI stack, such as graphics processing units at the compute layer, databases at the storage layer, development tools at the software layer, and AI models at the services layer.

Additionally, Datadog recently released a beta version of LLM Observability, a monitoring solution tailor-made for large language models that power generative AI applications. It released a beta version of Bits, a conversational interface that can surface insights and automate workflows to simplify incident resolution. Wolfe Research strategist Alex Zukin believes the rise of generative AI could make Datadog the "fastest-growing software company."

On that note, shares currently trade at 13.5 times sales, a bargain compared to the three-year average of 33.5 times sales. At that price, investors should feel comfortable buying a small position in this growth stock.

2. Docebo

Docebo specializes in corporate learning. Its platform helps businesses provision, personalize, deliver, and measure the impact of learning content across internal (employees) and external (customers, partners) audiences. Businesses can also automate the creation of learning content with Docebo Shape, a generative AI application that turns virtually any resource -- from online articles and case studies to white papers and presentations -- into training material.

Earlier this year, industry analyst Fosway Group recognized Docebo as a leader in the learning management systems (LMS) market for the sixth consecutive year, and Talented Learning awarded Docebo the highest score for all-purpose learning solutions. As another measure of success, Docebo has won the business of numerous high-profile companies, including Amazon, Coca-Cola, and Zoom Video Communications.

Despite difficult macroeconomic conditions, Docebo delivered a solid financial report in the second quarter. Its customer count climbed 16% to 3,591, revenue increased 25% to $43.6 million, and adjusted net income improved to $4.7 million, up from a loss of $729,000 in the prior year. Docebo also signed a major deal with a new customer described as another "big 5 U.S.-based global technology leader." While that customer was unnamed in the press release, the context points to Alphabet's Google.

Looking toward the future, investors have good reason to be bullish on Docebo. Management says its addressable market will reach $38 billion in 2026, leaving plenty of upside. Better yet, the company has historically grown more than twice as fast as the broader LMS market, meaning it has consistently taken share in the past.

With that in mind, Morgan Stanley analyst Josh Baer sees Docebo as one of the software vendors best positioned to monetize generative AI, and he believes revenue will compound at 17% annually through 2033. That forecast makes its current valuation of 8 times sales look reasonable, if not downright cheap. Investors should buy a small position in this little-known AI growth stock today.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, Docebo, and Zoom Video Communications. The Motley Fool has a disclosure policy.

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