Thanks to Elon Musk, artificial intelligence (AI) businesses have become some of the hottest stocks to buy right now. InvestorPlace contributor William White recently discussed some of the happenings at Tesla’s (NASDAQ:TSLA) AI Day. Included in that commentary were 11 things investors need to know about the billionaire’s plans for AI across his various businesses.
Of all of White’s points, I think the most critical is that Musk and company could have an AI prototype ready by 2022. And I do like the idea of sending my Tesla bot to the grocery store to go pick up some munchies. More importantly, though, the point also shines a light on other AI investments.
Ten years ago, you could have counted the number of these advanced stocks on one or two hands. Now, however, it seems that many companies of various sizes are working with this kind of technology.
So, to make things interesting, this piece will cover five stocks and two exchange-traded funds (ETFs) that are winning with AI today. By the end of this article, you’ll hopefully have a portfolio that runs all on its own — just like Tesla’s bot.
- Nvidia (NASDAQ:NVDA)
- Upstart (NASDAQ:UPST)
- Omron (OTCMKTS:OMRNF)
- Teradata (NYSE:TDC)
- Nemetschek (OTCMKTS:NEMTF)
- Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ)
- iShares Robotics and Artificial Intelligence Multisector ETF (NYSEARCA:IRBO)
AI Stocks to Buy: Nvidia (NVDA)
Wired recently published an interesting article back in June on Nvidia, describing how the company became a dominant force in AI chips. So, how did they do it? YouTube and cats.
Rather than using hundreds or thousands of CPUs (central processing units) to get the job done, Nvidia used 12 GPUs (graphics processing units) to successfully distinguish between different beings in online videos. Basically, the “neural network was shown ten million YouTube videos and learned how to pick out human faces, bodies and cats.”
And the rest is history.
As the Wired article points out, Nvidia’s GPUs have been used almost exclusively by the top four cloud providers — Alibaba (NYSE:BABA), Google (Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)), AWS (Amazon (NASDAQ:AMZN)) and Azure (Microsoft (NASDAQ:MSFT)) — to boost processing speeds. Further, some 70% of the world’s supercomputers use the company’s graphics units. Graphcore CEO Nigel Toon noted the following about the company:
“NVIDIA has done a fabulous job hiding the complexity of a GPU […] It works because of the software libraries they’ve created, the frameworks and the optimisations that allow the complexity to be hidden. It’s a really heavy lifting job that NVIDIA has undertaken there.”
However, as Wired notes, the next 10 years might not be as successful for Nvidia as the last 10. This is because more AI startups are gaining size and scale.
In the meantime, Nvidia continues to generate tremendous free cash flow (FCF). That has given NVDA stock a big push higher, helping to land it on this list of stocks to buy. I don’t expect that scenario to change anytime soon.
Next up on this list of stocks to buy is Upstart, a lending platform that uses a proprietary AI algorithm to more efficiently connect banks and individuals. When I started researching for this article, I knew very little about UPST. However, according to the company’s home page, four in five Americans have “never defaulted on a credit product, yet less than half have access to prime credit.” That means many people are paying more for their loans than they need to.
So, UPST is what you call a disruptor, using machine learning and AI to refine lending practices. This company has found that its model approves 26% more loans than the traditional model while lowering the average borrower’s annual percentage rate (APR) by 10%. And finally, while Upstart currently focuses on the U.S. consumer lending market, its AI platform could be applied to all credit markets.
Investors have certainly bought into this story. UPST stock went public in mid-December 2020 at $20 a share. It gained over 47% on its first day of trading and is now up 650% through Aug. 30.
The best part about Upstart, though, is that it reduces the level of defaults for its regional bank and credit union customers. Its win-win solution has led to fast growth. In 2017, the company had $51.2 million in revenue. That grew to $228.6 million in 2020, a 65% compound annual growth rate (CAGR).
I’m almost embarrassed to say that I hadn’t heard of Upstart before. But I know it now.
AI Stocks to Buy: Omron (OMRNF)
I selected Omron for this list of stocks to buy in part because Morningstar describes the Japanese company as an industrial conglomerate. You might not know this about me, but I’ve been obsessed with conglomerates of any kind since I was a kid.
I know conglomerates are a failed business philosophy from the 1960s and 70s, but they can deliver the goods when done right. Long-time Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) shareholders certainly can’t complain.
Omron’s ADR has performed well over the past five years. It’s got an annualized total return of 23.6% — more than double the Japanese equity markets as a whole and over 500 basis points better than the U.S. market as a whole.
Institutional Investor recently named Omron the “Most Honored Company” in the Electronics-Industrial sector for the fifth year in a row. The honor was part of the magazine’s annual ranking of Japanese executives.
Finally, while some might describe Omron as an industrial conglomerate, it’s really about automation and AI. In May, it talked about robots and AI and their part in the world’s future. Apparently, machines still have a lot to learn about human tasks. Felix von Drigalski, a researcher at Omron, noted the following about AI applications for everyday tasks:
“[L]aundry-folding robots have been studied worldwide but have yet to be realized. Just like the leather or cloth covers for car seats, it is extremely difficult to handle textiles with robots […] Humans can’t teach robots how to fold different kinds of clothes by showing them how to do it and describing the process in a program is practically impossible, so an AI module that learns these steps would be a promising application.”
At the end of July, Omron reported healthy growth in sales and profits at all of its operating segments. No wonder OMRNF stock is up 27% year-t0-date (YTD).
TDC stock is the next pick on list and also made my July gallery of 10 SMID-cap (small- and mid-cap) stocks to buy. I primarily chose this data analytics company because of its transformation from transaction-based business to recurring revenue — the Holy Grail of revenue streams.
In 2020, thanks largely to Teradata’s move to recurring revenue, this company’s FCF rebounded nicely after three consecutive years of falling. By 2019, FCF had fallen by 76% from 2016 levels, down to $94 million. In 2020, however, it jumped 137% to $223 million. As a result, the company expects free cash to exceed $400 million in 2021, up from its previous guidance of $275 million.
Based on a current market capitalization of $5.9 billion, Teradata has an FCF yield of 6.8%, despite a 142% appreciation of its share price so far in 2021. I consider anything between 4% and 8% to be growth at a reasonable price.
Teradata’s recurring revenue accounted for about 76% of sales in the second quarter, up from 71% a year earlier. It’s no surprise, then, that its FCF increased by 187% in the first six months of fiscal 2021.
As I said in July, TDC stock is a “diamond in the rough.”
AI Stocks to Buy: Nemetschek (NEMTF)
Next up, I selected this particular German company for this list of stocks to buy because it specializes in software solutions for the construction industry. My wife owns a small construction company with a partner, so I’ve been spending some time getting to know the industry a little better.
Of course, I thought about opting for a larger construction-related software company such as Autodesk (NASDAQ:ADSK), but I like that NEMTF stock has a market cap that’s a fraction of its size. That’s because I’ve found that mid-cap stocks often outperform their large-cap brethren without adding more risk.
This company has three revenue streams: recurring revenue — including software-as-a-service, subscriptions and more (60.1% in 2020) — software licenses (35.2%) and consulting & hardware (4.7%). As for geographic diversity, 24% of Nemetschek’s revenue comes from Germany, while another 32% comes from the rest of Europe, 34% from the Americas and 10% from the Asia-Pacific region.
In 2020, besides surviving the pandemic, one of the company’s goals was to increase its recurring revenue. It was able to do so by using rental models, wherein customers pay for when and how they use its software.
As a result, recurring revenue from service contracts and rental models increased by 21.1% over 2019. That also had a big part to play in the increase in overall recurring revenue as a percentage of sales in 2020. What’s more, over the past five years, Nemetschek has increased sales and EBITDA by 77% and 96%, respectively (Page 6).
This name ought to continue to benefit from the digitization of the building industry for years to come. I look forward to watching the company grow.
Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ)
BOTZ is an ETF from Global X, one of the more creative ETF providers. This firm seems to have a knack for spotting trends and jumping on them before others have a chance to.
This ETF tracks the performance of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The ETF’s home page states the following:
“Robotics & AI have wide-reaching application, extending far beyond industrial activity. BOTZ invests accordingly, with global exposure across multiple sectors and industries.”
Global X launched BOTZ back in September 2016. Today, it has more than $2.6 billion in total net assets. Of course, it isn’t cheap at an expense ratio of 0.68%, but I think you get what you pay for here.
BOTZ currently has 36 stocks in its portfolio, with three of the previous names mentioned in this article in its top 10. Additionally, its top three sectors by weighting are industrials (40.7%), technology (35.3%) and health care (13.1%).
As for the size of the companies held by the ETF, the weighted average market cap is $47.3 billion. Its beta is 1.14 versus the S&P 500, making it slightly riskier than the index.
To be considered for selection in the index, a stock must have a market cap of at least $300 million, be listed in a developed market, have an average daily turnover of at least $2 million and meet other criteria as well. The stocks in the index are also reconstituted and rebalanced on an annual basis. Finally, the maximum weight for any stock is 8% while the minimum weight is 0.3%.
I like the fact that this one has a concentrated portfolio. In my experience, this helps the returns
AI Stocks to Buy: iShares Robotics and Artificial Intelligence Multisector ETF (IRBO)
Last up on this list of stocks to buy is another ETF — the iShares version of an AI fund which tracks the performance of the NYSE FactSet Global Robotics and Artificial Intelligence Index. At 106 stocks, this ETF has three times as many holdings as BOTZ. Moreover, the top 10 holdings account for 12.74% of its $440 million in total net assets.
So, you get a more diversified portfolio with IRBO at a management fee that’s 21 basis points lower than BOTZ. Some investors will like that. I tend to like a smaller portfolio with thematic or sector-specific ETFs, but plenty of folks would opt for the lower fees.
Another difference that might not matter to some investors is that the U.S. and Japan combined weighting for IRBO is 66.33%. By comparison, BOTZ has a combined weighting of 79.5% for these two countries, made considerably higher by its 37.1% weighting for Japan.
IRBO’s top three sectors are technology (60.58%), communication (20.40%) and industrials (10.775). You’ll notice that this ETF’s tech component is also much larger than BOTZ’s.
Different strokes for different folks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.