[Editor’s note: “5 Artificial Intelligence Stocks to Consider” was previously published in October 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. Gartner estimates that spending on AI will grow at an average compound annual growth rate of 18%, reaching $383.5 billion by 2020.
Yet AI is not easy to develop. Huge amounts of data must be accessed to find 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.
Because of all this, only larger companies usually focus on AI.
Let’s take a look at five AI-intensive companies that stand out:
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, Google is a top player in autonomous vehicles. The company’s Waymo unit could be worth as much as $175 billion, according to analysts at Morgan Stanley.
Finally, the valuation of GOOG stock is at reasonable levels, with the forward price-to-earnings ratio at 22.6, which is below other mega tech operators like Microsoft (NASDAQ:MSFT). That puts it at the top of the heap among artificial intelligence stocks.
Nvidia (NASDAQ:NVDA) is the pioneer of GPUs (Graphics Processing Units), which are chips that process large amounts of data cost-effectively. 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 them to companies for use in datacenters and autonomous vehicles.
No doubt, it has been a very good move. Consider that NVDA had been on a strong growth ramp before flattening a bit at the end of its last fiscal year.
It’s true that the valuation of NVDA stock is far from cheap, with the forward price-to-earnings ratio at 28.5x. But then again, a premium is to be expected for a company that is a leader in a massive industry.
For example, earlier this year Evercore ISI analyst C.J. Muse boosted the price target on NVDA stock to $400, which implied 41% upside and now implies a gain of nearly 100%. In his report, he noted that the company’s technology is “becoming the standard AI platform.”
AI is nothing new for IBM (NYSE:IBM). 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. Note that during the over a recent 12 months period , IBM’s Strategic Imperatives, which include cloud computing, security, analytics, Big Data and mobile, generated $40 billion, more than 50% of its total revenues. This has helped improve the growth rate of the overall business.
IBM stock also has an attractive dividend yield, which is at 4.8%. This is one of the highest in the tech industry. And its valuation is reasonable as well. Consider that the forward P/E ratio is only ten.
Yext (NYSE:YEXT) has been among the most exciting Artificial Intelligence stocks.
That’s because the company is a top data provider, with integrations of over 150 services from operators like Google, Apple (NASDAQ:AAPL), Amazon.com (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.
“Today, we manage more than 185 million facts about our customers in our platform, providing brand-verified answers in services like Google, Siri, Alexa and WeChat to consumers looking for information verified by the source of truth,” CEO Howard Lerman noted on a previous earnings call.
Its growth has been strong, as the company has been getting a great deal of traction with enterprise customers.
When it comes to the search business, Baidu (NASDAQ:BIDU) remains the king in China.
BIDU has 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 has an installed base of 100 million devices and processes over 400 million queries a month. Then there is Apollo. It is an AI system for autonomous vehicles. Recently, BIDU partnered with King Long Motors to launch the first fully self-driving L4 minibus.The AI efforts have been paying off, and BIDU’s business model will enable it to grow easily.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.