Artificial intelligence is evolving fast, and we’ve all seen how game-changing it can be. From automation to deep learning, AI is reshaping industries, and investors are taking notice. But here’s the big question—which AI stocks should you grab before the next boom?

The ASX 200 is home to some exciting ASX AI stocks, and with the industry on the rise, now might be the perfect time to invest in AI. While global players like OpenAI stock get all the headlines, Australia has some promising artificial intelligence stocks to invest in that could deliver serious long-term gains.

In this blog, we’ll dive into two AI stocks ASX investors should watch closely. These companies are at the forefront of artificial technology stocks, making them strong contenders for anyone looking for the best AI companies to invest in. Before the next rally, these picks could be worth adding to your watchlist!

Megaport Limited (ASX: MP1)

Megaport Ltd. engages in the provision of software-defined networking based elastic interconnection services. Its products include Port, MCR, Megaport Marketplace, and MegaIX. It operates through the following geographical segments: North America, Asia-Pacific, and Europe. The company was founded by Bevan Andrew Slaterry in 2013 and is headquartered in Brisbane, Australia.

From the Company Reports:

Megaport Limited (ASX: MP1) has demonstrated a strong financial turnaround in FY24, reporting total revenue of $195.3 million, a 28% increase from FY23.

The company’s Annual Recurring Revenue (ARR) grew to $203.9 million, highlighting the strength of its subscription-based model. Notably, gross profit rose by 32% to $136.8 million, reflecting improved operational efficiency.

The most significant milestone was achieving a record EBITDA of $57.1 million, marking a $36.9 million improvement, driven by a shift toward profitable, efficient growth.

Moreover, Megaport recorded its first-ever net profit after tax of $9.6 million, a substantial $19.4 million improvement from the previous year’s net loss.

The company also generated $28.0 million in net cash flow, reflecting disciplined financial management, with its cash balance surging 84% to $61.2 million.

Competitive Moat:

Megaport possesses a formidable competitive moat in the data center and technological services market, primarily driven by its status as the largest Network-as-a-Service (NaaS) provider globally. The company pioneered private Multicloud connectivity on a global scale, offering seamless, code-provisioned interconnections between major cloud providers. With an extensive Data Center Interconnect (DCI) and Global Wide Area Network (WAN) spanning over 860 data centers across 24 countries, Megaport ensures unparalleled reach and flexibility. Notably, 100G connectivity is available from 597 of these data centers, reinforcing the company’s high-speed, scalable network infrastructure. This robust ecosystem not only enhances service reliability but also creates high switching costs for enterprises, strengthening Megaport’s market positioning. Additionally, the company’s ability to deliver rapid, software-defined networking solutions gives it a significant edge over traditional network service providers, securing its dominance in the evolving cloud and data connectivity landscape.

Sustainability Edge:

Megaport demonstrates strong sustainability in its revenue growth, driven by a steadily expanding recurring revenue base. The company’s introduction of new services and strategic expansion into new markets has significantly broadened its customer base while also increasing the number of services utilized per customer. Moreover, partnerships with major industry players such as Fidelity Investments, Disney, Adobe, and Sephora reinforce its long-term revenue stability. A key indicator of sustainability is the substantial rise in Annual Recurring Revenue (ARR) over the years, underscoring Megaport’s ability to maintain its impressive growth trajectory and solidify its market leadership in cloud connectivity solutions.

Data#3 Limited (ASX: DTL)

Data#3 Ltd. engages in the provision of on premise, outsourced, and cloud technology solutions in a hybrid information technology throughout Australia and Asia Pacific. The company was founded by Terry Powell and Graham Clark in 1977 and is headquartered in Brisbane, Australia.

FY24 Highlights:

Data#3 Limited (ASX: DTL) recently announced its financial results for FY24, ending 30 June 2024, reflecting solid performance across key financial metrics.

Gross sales grew by 7.6% year-over-year to $2.8 billion, driven by robust demand across its portfolio. Statutory revenue saw a modest increase of 0.4%, reaching $815.7 million, while gross profit climbed 7.8% to $270.1 million, indicating strong operational efficiency.

Earnings before interest and taxes (EBIT) rose 5% to $53.5 million, highlighting disciplined cost management despite market challenges. Net profit before tax (NPBT) surged 16.6% to $62.1 million, translating into a net profit after tax (NPAT) of $43.3 million, up an impressive 17%. This robust profitability growth is further reflected in a 16.9% rise in basic earnings per share (EPS) to 28.00 cents.

Data#3 rewarded shareholders with a 16.4% increase in its total fully franked dividend to 25.50 cents per share.

Historical Financial Snapshot:

Data#3 Limited has demonstrated remarkable financial progress over recent years. The company achieved a significant improvement in net margins, which expanded from a modest 1.3%-1.4% range prior to 2023 to an impressive 5.38% in 2024. This margin expansion fueled net income growth from $23 million in 2020 to $43 million in 2024, showcasing exceptional profitability gains. Return on Invested Capital (ROIC) also surged to nearly 50% in 2024, reflecting superior shareholder returns. Despite its extensive scale, Data#3 maintained a stable sales growth trajectory, with gross sales increasing from $1.62 billion in 2020 to $2.75 billion in 2024, underlining its operational resilience and market strength.