Portfolio manager Andrew Graham appeared in CNBC’s “Ask an Advisor” op-ed segment in mid-April. The founder and managing partner of Jackson Square Capital provided investors with a clue as to where they should look for AI opportunities:
[T]he safer bets could be on the companies that will help make [artificial intelligence] a reality, regardless of who wins the AI arms race. At the same time, it’s probably best to wait for a better opportunity to jump in because anyone going headlong into AI now will pay a steep price.
That’s excellent advice because the companies we think have the best AI applications and solutions today might not even exist three to five years from now. As a result, AI investing success requires considerable due diligence and patience from investors.
Conservative investors may want to cast a broader net in the form of an exchange-traded fund (ETF) or mutual fund rather than investing in one or two leading AI companies. However, if it’s individual AI opportunities you seek, the three below, selected from the top holdings of the First Trust Nasdaq Artificial Intelligence and Robotics ETF (NASDAQ:ROBT), have interesting AI applications that are expected to grow in the next few years.
| PRO | PROS Holdings | $27.96 |
| NOW | ServiceNow | $442.28 |
| ANSS | ANSYS | $312.70 |
PROS Holdings (PRO)
PROS Holdings (NYSE:PRO) provides an AI-based platform that gathers and analyzes data to enable companies to offer their end-user customers personalized pricing and product suggestions.
CEO Andres Reiner provided an example of how customers use its platform in the Q4 2022 conference call:
Signature Aviation, a B2B aviation services company, selected PROS in Q4 to take advantage of our latest Gen IV AI advancements to fuel their profitable growth strategy. In travel, the disruption airlines have experienced over the last couple of years has increased their focus on extreme automation and full digitization of the customer experience. Our Digital Offer Marketing and Dynamic Offer Solutions are helping airlines entice customers with relevant offers and pull them into direct and digital channels, driving higher conversion rates through channels with lower cost of sales.
In 2018, the company launched its Gen III platform, which included dynamic pricing. If you Uber a lot, you know about dynamic pricing. You see it everywhere today. Then, in 2022, it launched Gen IV, a “deep neural network” that improved the platform’s ability to accurately predict what customers would pay for a given item.
PROS Holdings generated $276.1 million in revenue in 2022, 10% higher than in 2021. Its subscription and maintenance revenue accounted for 84% of total revenue. More importantly, its subscription annual recurring revenue (ARR) was $229 million, excluding currency, 17% higher than a year earlier. While the company is not yet profitable, losses are shrinking.
Retail is a tough game. However, PROS’ platform makes it slightly easier.
ServiceNow (NOW)
The Now Platform from ServiceNow (NYSE:NOW) helps companies digitize their entire business by optimizing processes and connecting silos, eliminating the friction that exists with legacy computer systems.
In 2022, ServiceNow generated $6.9 billion in subscription revenue from over 7,700 customers, including 85% of the Fortune 500. As a result, its free cash flow was a whopping $2.18 billion, or 30% of its $7.25 billion in total revenue. That’s a very healthy free cash flow margin.
Based on this free cash flow and a market capitalization of $90.1 billion, ServiceNow has a free cash flow yield of 2.4%. That puts it outside my fair value zone of between 4% and 8%. However, we are talking about a company growing subscription revenue by nearly 30% annually.
Between now and 2028, estimates suggest that large enterprises will represent the most significant growth in AI for project management. That’s right up ServiceNow’s alley, as its Now Platform uses AI search for help desk personnel to accelerate finding documentation needed to solve problems.
ServiceNow also updated its Document Intelligence AI tool in March, which allows companies to pull information from documents and input it into business apps without manual data entry, saving time and money.
Ansys (ANSS)
Ansys (NASDAQ:ANSS) uses AI and machine learning to help engineers and designers create better simulations to improve and accelerate the product development process. It has been designing engineering simulation software for more than 50 years and has helped to advance some of the world’s greatest innovations.
“At Ansys, we can use AI/[machine learnings] methods to automatically find the parameters of simulation to simultaneously improve speed and accuracy. We can use augmented simulation to speed up the simulation by factors of 100X by training neural networks via data-driven or physics-informed methods. Advanced simulation technology, enhanced with AI/ML, is underpinning the engineering design process,” states the company’s website.
In 2022, the company generated $2.07 billion in revenue, up 8%, with operating income of $592.7 million, 15.5% higher than in 2021. Ansys finished the year with $1.42 billion in deferred revenue and backlog and an annual contract value (ACV) of $2.03 billion, 14% higher than 2021, excluding currency fluctuations. Management expects to grow ACV between 9.9% and 13.4% in 2023 on a constant-currency basis.
Ansys finished 2022 with just $275 million in net debt, a meager 1% of its market cap. That makes it a solid long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
