THINKING ABOUT INVESTING IN AI STOCKS? READ THIS FIRST

Over the next decade or two, artificial intelligence is set to become an integral part of our lives. Already AI is used to decide which ads to show us on websites and to recommend music to you on Spotify and other streaming platforms. But there is far more potential for AI to improve efficiencies across industries. This post highlights the companies set to benefit from the growing use of artificial intelligence.

What is artificial intelligence?

AI refers to any program or machine that can make intelligent decisions. Essentially, AI programs process data and then make decisions. The data can come in the form of images, sounds, text, or any other input. Not only can AI programs make intelligent decisions, but they can learn and improve their performance with time.

In many cases, AI programs can make better decisions than humans, they can make them faster, and they are less prone to error. Typically, machines can also run 24 hours a day for a fraction of the cost of a human.

AI Stocks to Watch

Broadly speaking there are two types of AI companies. Firstly, there are large technology companies that use AI to operate and create AI-powered solutions for their clients. These companies may not specialize in AI, but they have significant experience with the technologies. The following are examples of these companies:

Google/Alphabet (GOOG) has been at the forefront of developing and using AI and big data since its inception. They use AI across all their businesses and may have more experience in the field than any other company. In fact, Google developed TensorFlow, a widely used programming language for machine learning applications. Google’s approach to investing in hundreds of projects with “blue sky” potential means there’s a good chance they will create more billion-dollar companies in the future.

IBM (IBM) has been working on AI and similar technologies since the 1960s. With projects like Deep Blue and Watson, IBM has remained at the forefront of AI research. The company is going through a challenging transition from a hardware company to a company offering cloud, security, and AI solutions. The turnaround has not borne fruit yet—but it’s worth watching IBM because they are well-positioned for the next wave of AI adoption.

Baidu (BIDU) is a Chinese company, very similar to Google in many ways. Baidu owns a large portfolio of companies and uses AI across all of them. Their autonomous vehicle operating system, Apollo, is regarded as one of the best in the world. They have also developed leading language processing IP and have filed numerous patents related to machine learning.

Microsoft (MSFT) is investing billions in developing AI-powered solutions. These span several industries but the projects they are working on in the fields of medicine and natural language processing are most interesting. We can expect Microsoft to launch AI products for almost any industry in the future. Perhaps most compelling, is their client base which will give them a head start when selling new products.

Other large companies with significant AI capabilities include Amazon, Tencent, and Facebook.

Next, we have the smaller companies in the AI space which are typically more focused. Some develop software with specific AI applications, while others develop hardware used to run AI programs. These are some of the companies to watch in the future:

Nvidia (NVDA) is the world’s leading GPU (graphics processing unit) manufacturer. GPUs are the preferred processing units for running AI programs as they can execute numerous programs at the same time. The more widely AI is used, the more demand there will be for hardware to run the algorithms. Nvidia is one of the best-positioned hardware companies for the AI revolution.

Alteryx (AYX) offers cloud-based data analytics programs. Their solutions allow companies to store any data they collect and then use data science to analyze that data. To gain an edge, companies need to embrace AI and apply it to any data they can. This can help them predict trends and react faster to changing market conditions. Alteryx provides a scalable solution for companies to get as much value out of their data as they can.

DXC Technology (DXC) is at the forefront of developing programs that allow machines to be trained. Agile Process Automation is a platform developed by DCX that allows manufacturers to train machines on their production lines to improve efficiency and performance.

Twilio (TWLO) develops tools that allow developers to include automated messaging in applications. These tools are used to turn voice calls to text and even to understand and respond to voice and text messages. These tools are used to develop chatbots and AI-powered CRM applications.

Ceva (CEVA) develops IP (intellectual property) cores or blocks for semiconductor manufacturers. The IP they develop is used to control the circuit boards used in nearly every device involved in automation, including sensors and computer vision. This includes autonomous vehicles, robots, IoT devices, drones, and automated factory machinery.

AI Investment considerations

The next 10 years may be the most important time ever to invest in AI. However, not all AI companies will be winners and shares prices won’t go up in a straight line. When it comes to the larger companies, you will need to consider the entire company, not just its AI products. In this case, you are investing in the company’s culture and its ability to keep innovating.

With the smaller companies, you should look for signs that a company is gaining traction in the market. The key to look out for is growing revenue and improving operating margins. If a company can consistently grow its revenue, it must be doing something right. If its operating margin is consistently improving, it implies the company isn’t having to spend increasing amounts on marketing to grow its profits. Improving margins can also imply the company has pricing power and is establishing a moat.

As with any small technology company, keep your positions small and wait for earnings to compound. You will probably have to ride quite a lot of volatility. Not every investment will work out, but the winners should more than offset the losers if your initial investments are small.

 

 

 

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