Investors continue to pile money into artificial intelligence (AI) stocks. However, they are becoming more discerning. Specifically, they are looking for companies using AI in ways that offer a competitive advantage.
Finding these companies isn’t hard. Many small companies are doing innovative things with AI. Unfortunately, many of those companies are not publicly traded. And several publicly traded are speculative penny stocks that are not appropriate for all investors.
Over time, many of these companies will likely be acquired by companies with larger market caps and the cash to scale their ideas. Some companies may be years away, but you don’t have to wait that long. Many large-cap companies are already using AI in innovative ways.
This gives investors strong growth prospects with the security of a solid balance sheet. This article focuses on three large companies using AI to help them establish a competitive edge.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG,GOOGL) could make this list for several reasons. However, my narrow focus is Alphabet’s DeepMind subsidiary.
One of the more compelling applications for AI (to me, anyway) is its ability to speed drug development. DeepMind is using AI to analyze the structure of proteins. The company’s AlphaFold Protein Structure Database, which the company refers to as “the Google search for protein structures.”
AlphaFold uses AI to predict the 3D structure of a protein from its amino acid sequence. It then shares that information with the broader scientific community to help accelerate the pace of new drug discovery.
The only way to invest in DeepMind is via Alphabet, one of the Magnificent 7 stocks from 2023. GOOGL stock is up more than 60% in the last 12 months. However, the company is still projecting earnings growth of 15%, and analysts continue to bid the stock higher. On January 9, 2024, BMO Capital Markets initiated coverage on Alphabet with an Outperform rating and a $170 price target, more than 20% higher than the current price.
John Deere (DE)
John Deere (NYSE:DE) is one of the companies leading the AI revolution in precision agriculture. The company’s “See & Spray” technology uses AI to distinguish between a crop plant and a weed to reduce chemical waste and improve crop health. And one of Deere’s primary goals is to make agriculture “fully autonomous” for some crops by 2030.
Industry experts predict that AI could potentially double crop yields by 2050. That’s innovation that would pay for itself and be a reason for farmers to upgrade to Deere’s AI-enabled equipment.
But with a dividend yield of just 1.55, is DE stock a good buy for growth investors? The company expects earnings growth to be flat to slightly lower over the next 12 months. Still, analysts give DE stock a consensus $428.30 price target, which is 9% higher than its current price. And it’s hard to ignore a forward price-to-earnings (P/E) ratio of just over 11x.
McDonald’s (MCD)
Long-term income investors appreciate McDonald’s (NYSE:MCD) for its stable growing dividend, which has been growing at about 7% in the last three years. However, for some investors, the knock on McDonald’s is how long the growth can last.
However, McDonald’s was an early adopter among companies using AI. The company has been investing in machine learning since well before 2020. However, the global pandemic illustrated to investors how effectively the company’s work was paying off. The McDonald’s mobile app is not only helping to improve the efficiency of its drive-through operations but also also enables the company to send customers targeted offers based on their order history.
It also helps boost the company’s margins,, which drives growth that the company then passes along to customers via share buybacks and all-important dividends.
With a forward P/E ratio of around 24x, MCD stock is not what you’d call a value. However, the company is projected to grow earnings by 6%. Analysts expect that the company’s stock price will increase by 8% in the coming year. When you add that to a 2.28% dividend yield, McDonald’s looks like a tasty pick in 2024.
On the date of publication, Chris Markoch had a LONG position in MCD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
