Machine learning stocks represent a promising long-term opportunity for investors. And they are not just about red-hot startups. There are also a myriad of mature operators that should benefit investors.
Machine learning is a subset of AI (Artificial Intelligence). It’s about using sophisticated algorithms to find patterns in large amounts of data.
Note that machine learning is far from new. The roots actually go back to the 1950s when computers were starting to emerge. Machine learning, for example, would allow for missile guidance systems, help with landing on the moon, and even facilitate computer-based chess.
But of course, the past decade has seen major strides in machine learning. This has been the result of heavy investments across different technologies like cloud computing, high-end storage systems and GPUs (General Processing Units). There have also been advances in underlying theories and techniques for algorithms.
So then, what are some of the interesting machine learning stocks? Let’s take a look at seven:
International Business Machines (IBM)
IBM has definitely been in a funk for some time. During the past five years, the shares have gone from $140 to $114, putting the market capitalization at $111 billion.
But investors should not throw in the towel. Consider that IBM has spent decades in the machine learning industry. This technology advantage will help to revive growth.
At the heart of this is IBM Watson. It is a versatile AI system that has been able to span across many industries like medicine, financial services, education, government and so on. Watson will also be essential for the hybrid cloud strategy – which will be bolstered with the RedHat acquisition — as well as investments in quantum computing.
Granted, one of the issues for IBM has been its complex organization and legacy technologies. They have ultimately weighed on growth. But IBM’s management is taking swift action to streamline the organization. To this end, the company plans to spin-off its infrastructure services unit.
It’s true that IBM still has much to prove. But for the most part, it seems like a lot of the bad news is already factored into the stock price, with the forward price to earnings ratio at 14x. The dividend is also quite attractive: 5.2%.
Sumo Logic (SUMO)
Sumo Logic, which operates a sophisticated data platform, went public in mid-September. But the IPO has faltered. SUMO stock is off about 3% since its debut.
Yet this presents investors with an opportunity to get a better value for a fast-growing company. Founded in 2010, the firm has built a system that helps with Continuous Intelligence. This means the software can help companies automate the collection, ingestion and analysis of data. This can help with a variety of use cases like cybersecurity and IoT (Internet-of-Things) analysis. Consider that Sumo Logic processes an average of 873 petabytes of data each day and an average of 18.6 billion events per second.
How does this make Sumo Logic a good candidate for top machine learning stocks? Note that the technology is a key part of the platform. Sumo Logic uses machine learning to detect anomalies in real time, uncover global KPIs (Key Performance Indicators) and find key risk indicators.
In terms of growth, Sumo Logic has seen its revenues go from $67.8 million in fiscal 2018 to $155.1 million in fiscal 2020. There has also been an increase in deal sizes. During the past year, the number of customers with ARRs (Annual Recurring Revenues) of over $1 million has gone from seven to 29.
Alphabet (GOOGL, GOOG)
Among the machine learning stocks, Alphabet has been company that was one of the first to make AI part of the overall vision. In 2017, CEO Sundar Pichai said his company was “AI first.”
But before this, the technology was certainly very strategic. For example, the Google search engine would have imploded without the important capabilities of AI. The technology has been leveraged across the other applications and platforms like YouTube, Gmail and Maps – which has enhanced both the user experience and monetization.
Google is also a pioneer of self-driving cars. The company created Waymo, one of the leaders in the industry. In May, this business unit raised $2.25 billion from Silver Lake, Andreessen Horowitz and AutoNation (NYSE:AN).
True, GOOGL stock is somewhat pricey as the forward price-to-earnings ratio at 34x. But given the strong technology infrastructure and long-term growth prospects, a premium is warranted.
While machine learning can be quite powerful, the technology is also complex. A data scientist will often have an advanced degree in an area like analytics, mathematics or computer science. But this makes it difficult for smaller companies or non-tech operators to attract this type of talent.
So what to do? One approach is to use a software tool that is focused on non-technical people, such as managers or business analysts. And one of the top players is Alteryx. The company’s platform seamlessly connects to many data sources and has simple low-code functions to perform powerful analysis. It’s all about catering to the needs of the “citizen data scientist.”
Earlier in the year, AYX stock got slammed because of concerns about the Covid-19 virus as customers were pulling back. But this has proved to be temporary. In the latest quarter, AYX has shown that it is regaining its momentum.
It definitely helps that the company has been expanding the software’s capabilities. For example, there is Analytic Process Automation, which allows for business process automation. The company has leveraged its analytics expertise to provide a broader suite that provides for end-to-end digital transformation.
According to the company’s press release: “The code-free, code-friendly platform can automate analytics and data science pipelines, manage complex data-centric business processes and deliver actionable insights for stakeholders in every line of business.”
Founded 2003, DocuSign has become the dominant player in electronic signatures for contracts. It’s a massive industry that has gotten a boost from the Covid-19 pandemic. Companies have used DocuSign as a way to better work with remote teams.
The company has more than 500,000 paying customers and hundreds of millions of users across more than 180 countries. The customers range from small businesses to multinationals.
In the latest quarter, revenues spiked by 45% to $342.2 million and the cash flows from operating activities came to a hefty $118.1 million, up from $26.4 million in the same period a year ago. And yes, DOCU stock has been a nice winner.
With its enormous data repository, DocuSign is in an ideal position to capitalize on machine learning. The technology can help derive insights from contracts, provide alerts for risks and help with extensive searching.
DocuSign has been bolstering its machine learning with some interesting acquisitions. Perhaps the most impactful has been the deal for Seal Software in 2018. The company, which was founded in 2007, is a pioneer in AI-based contract systems.
During the past five years, Microsoft has transformed itself by aggressively adopting the cloud, resulting in solid gains in MSFT stock.
While this trend will continue, the company is also looking at machine learning. Keep in mind that it has already been adept at integrating the technology across is product line.
But Microsoft has also benefited from machine learning from its Azure cloud platform. The company has been frequently adding new features for computer vision, natural language processing (NLP), deep learning, character recognition and so on. Then there is the leveraging of Microsoft’s massive developer platforms, like Visual Studio Code and GitHub.
Microsoft’s machine learning ambitions also go beyond typical business processes. Note that the company has invested $1 billion in OpenAI, which is one of the leaders in AGI (Artificial General Intelligence). This is where AI is able to have broad intelligence like a human.
True, this will take time – maybe in even decades. But to remain competitive, Microsoft knows it needs to make long-term bets on fundamental technologies.
Palantir Technologies (PLTR)
The IPO market is a good place to find cutting-edge machine learning stocks. An example is Palantir Technologies. Founded in 2003, the company has strong Silicon Valley roots. Note that one of the co-founders is Peter Thiel, who is the co-founder of PayPal (NASDAQ:PYPL) and the original outside investors in Facebook (NASDAQ:FB).
The initial focus for Palantir was on building sophisticated analytics systems for governments. Much of the work was actually been under wraps because of the sensitive nature of the programs. But there is buzz that Palantir helped to locate terrorist Osama bin Laden.
Palantir has since expanded its business into commercial areas, in industries like healthcare, energy, transportation and manufacturing. For the most part, growth has been robust. During the first half of this year, revenues shot up by nearly 50% to $481.2 million. The company estimates its market opportunity at an enormous $119 billion.
PLTR stock also looks like a play on the Covid-19 pandemic. According to a report in the Wall Street Journal, the company is working with the federal government to build a system for the rollout of vaccines. The machine learning technology could prove useful in handling the complex issues of supply chains.
If successful, the project would be a showcase of the company’s powerful technologies and should lead to even more business.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups 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.