[Editor’s note: “5 Artificial Intelligence Stocks to Consider” was previously published in December 2019. It has since been updated to include the most relevant information available.]
I attended a meeting of startup founders who pitched their companies. Interestingly enough, many of them touted their use of artificial intelligence. This technology has quickly become red-hot. After all, the market opportunity is massive. Forbes estimates that spending on AI will reach $20.8 billion by 2024. Unsurprisingly, almost all investors want to talk about artificial intelligence stocks.
Yet AI is not easy to develop. Huge amounts of data must be accessed to find complex and intricate patterns. Moreover, top-notch data scientists must be hired to work on AI. As should be no surprise, this kind of talent is in short supply nowadays — and the salaries are far from cheap.
Because of all this, only larger companies usually focus on AI. However, there are still plenty of opportunities for investors to benefit. Here are five artificial intelligence stocks worthy of attention:
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- Nvidia (NASDAQ:NVDA)
- International Business Machines (NYSE:IBM)
- Yext (NYSE:YEXT)
- Baidu (NASDAQ:BIDU)
Artificial Intelligence Stocks: Alphabet (GOOG, GOOG)
Alphabet CEO Sundar Pichai refers to the company as “AI first.” And this is certainly not hype.
AI has become pervasive across the product line, such as with Gmail, YouTube, Maps, Photos, Google Cloud and so on. The company has also developed its own assistant, which connects with more than 5,000 devices in the home.
Google has been creating industry standards for AI as well, primarily through its own language called TensorFlow. Just some of the companies that use it include Uber (NYSE:UBER), eBay (NASDAQ:EBAY) and Coca-Cola (NYSE:KO).
Also, Alphabet is a top player in autonomous vehicles. The company’s Waymo unit is a pioneer in the industry and recently snagged $2.25 billion in funding from investors like Silver Lake, Andreessen Horowitz and AutoNation (NYSE:AN).
Finally, the valuation of GOOG stock is at reasonable levels, at least on a relative basis to other mega tech operators like Microsoft (NASDAQ:MSFT). The current price-earnings ratio is roughly 30.5 times.
Nvidia is the pioneer of GPUs, which are chips that process large amounts of data cost-effectively and in parallel. The technology was initially focused on the gaming market.
But NVDA realized that GPUs were also ideal for AI. To this end, the company has sold these sophisticated chips to companies for use in data centers and autonomous vehicles.
No doubt, it has been a very good move. Consider that NVDA stock had been on a strong growth ramp. In the latest quarter, revenues jumped by 39% to $3.1 billion and profits more than doubled to $1.47 per share. As for the data center segment, the top line saw an 80% spike to $1.1 billion.
It’s true that the valuation of NVDA stock is hefty, with the price-earnings ratio at 78 times. But then again, a premium is to be expected for a company that is a leader in a massive industry.
International Business Machines (IBM)
AI is nothing new for International Business Machines. The company has been developing this type of technology for many years. For example, back in 1985, it developed its AI computer called Deep Blue.
Deep Blue actually beat chess world champion Garry Kasparov in 1996. Then in 2011, IBM created Watson to take on the best players on the quiz show Jeopardy!. The computer won.
IBM has definitely had its troubles. But the investments in AI and other cutting-edge technologies have been making a difference. For example, in the most recent quarter there was a 30% increase in cloud-computing revenues to $6.3 billion. A key to this has been AI, as well as the transformative acquisition of Red Hat, which is a leader in enterprise open-source software.
IBM stock also has an attractive dividend yield, which is at 5.2%. This is one of the highest yields in the tech industry. And its valuation is reasonable as well. Consider that the P/E ratio is only 14.1 times.
Artificial Intelligence Stocks: Yext (YEXT)
Yext has been among the earlier-stage artificial intelligence stocks. The company came public in March 2017.
Then what’s the AI play with Yext? It’s about data, which is the fuel for creating effective models and algorithms. Yext is a data provider with integrations with over 150 services from operators like Google, Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft, Facebook (NASDAQ:FB) and Tencent (OTCMKTS:TCEHY).
Yext has also added context and intent to all this, which allows for more accurate real-time searches.
It’s true that growth has decelerated, primarily because of the delay in purchases resulting from the novel coronavirus. But this is likely to be temporary. Consider that the company has been seeing a pick-up in query volumes and it has entered a major strategic partnership with Adobe (NASDAQ:ADBE), which should help drive revenues.
When it comes to the search business, Baidu remains the king in China.
BIDU has also invested heavily in becoming a serious AI company. This has helped it personalize the search experience and improve the impact of online ads.
But AI has done more than just bolster BIDU’s own platform. The company has created several platforms for third parties. One is DuerOS, which processed 3.3 billion voice queries in March, up nearly 5 times on a year-over-year basis.
Then there is Apollo. It is a self-driving platform that powers more than 100 autonomous vehicle types across 17 cities in China.
These AI efforts have been paying off, and Baidu’s business model will enable it to grow easily.
Tom Taulli (@ttaulli) is an advisor and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.