Investing In Artificial Intelligence
Artificial intelligence (AI), a non-mainstream concept up until 2021, is now the talk of the town. From the idea of basic automated tasks to extensive news coverage, AI is everywhere.
AI has generated a phenomenal amount of interest over a short period of time. Google Trends data suggests the term “artificial intelligence” reached its peak popularity (100) between April 30 and May 6, 2023. On that same scale of 100, interest in AI currently stands at 78. This interest, coupled with AI’s tremendous utility, has helped it garner massive investment, over recent years. Worldwide private investment in AI shot up from $48 billion in 2020 to more than $90 billion in 2021 and in 2022. Goldman Sachs research indicates there’s potential to cross $110 billion in 2023.
The launch and growth of OpenAI’s ChatGPT AI chatbot provides evidence. Launched in November 2022, ChatGPT set records in terms of the number of users. It’s free, easy to use, versatile and its timing matched perfectly with the rising interest in AI. The tool just took a week from launch to cross above 100 million users. Compare that to TikTok, which took nine months to cross that number while Netflix
NFLX
had to wait for 3.5 years before it could boast more than 100 million users.
Large tech companies have been heavily investing in AI, while many new AI-focused start-ups have cropped up. According to an MIT study, about 92% of large companies are getting returns on their AI investments. The study highlighted the importance of using available AI tools, investing in complementary technology and creating a supportive infrastructure, as key for AI to lead to growth. Smaller AI-focused firms, due to limited resources, are often not able to put all this together. However, if they do, the risk and return numbers could both be substantially higher than any large firm foraying into AI.
Nvidia (NVDA), with its first-mover advantage, is a dominant leader in the AI semiconductor chips space. So much so that it is now being investigated for anti-competition abuses. You would find the company listed on almost every top AI stocks list on the web, with retail as well as institutional investors piling into the stock with both hands. NVDA has returned nearly 300% over the last 12 months. But a lot of these gains may be purely sentiment-driven so you may want to wait for the stock to start trading at more reasonable valuations. The AI picks from the MAMAA stocks (Meta Platforms, Amazon
AMZN
, Microsoft, Apple
AAPL
and Alphabet) also have high P/Es, with cloud giants Amazon, Microsoft
MSFT
and Google (GOOG), trading at forward P/E ratios of 60, 30 and 25, respectively. NVDA has a P/E of 110.
In this article, we look beyond Nvidia and MAMAA stocks, in search of more reasonable valuations. We identify three other AI stocks that investors can consider buying.
From healthcare to retail, finance to education… AI is the catalyst for innovation across major industries. Ignite your portfolio—get the names of the top companies driving the AI revolution in this exclusive Forbes report, 12 Top AI Stocks to Buy Now.
Are AI Stocks Booming Now?
AI stocks have been on the rise since March 2020. November 2021 marked a very visible peak in most AI stocks’ price history so far. Third-quarter 2023 has been yet another good period for blue-chip AI stocks such as Nvidia, Microsoft, Advanced Micro Devices
AMD
, Taiwan Semiconductor (TSM), Amazon and Alphabet/Google (GOOGL). Year to date, these stocks are up about 220%, 37%, 68%, 21%, 49% and 54%, respectively. The U.S. benchmark S&P 500 index has gained about 13% over the same period.
AI stocks definitely have had a good run so far in 2023. Nvidia, particularly–powered by its first-mover advantage, investment and innovation into AI–has been the forerunner of the surge in AI stocks. However, the supply shortage of AI chips globally remains a bottleneck. The number of companies using generative AI technology is increasing by the day, leading to increased demand for AI chips. However, supply chains of semiconductor chips continue to experience some strain. Tech behemoth Microsoft has now included GPU supply as a possible operational risk to its business in its latest annual report.
3 Top AI Stocks Besides Nvidia & MAMAA
Nvidia manufactures and supplies more than 80% of the market for semiconductor chips that are needed to run AI applications. Nvidia and its investors have been reaping the benefits of the company having a dominant position in the AI economy so far.
As I mentioned, NVDA has delivered a whopping 220% return to its investors YTD and about 290% over the past one year. It currently trades at around $468 per share, not far from its 52-week high price of $503. The consensus price for the stock per analysts is currently set at about $643 indicating there could still be some scope for further gains in the stock. However, with Nvidia stock trading at an exuberant multiple (TTM P/E = 110) as compared to peers (sector median P/E of 25) and the broad market (P/E = 24), investors looking for an entry point may want to exercise some caution there.
And while AI investors wait for NVDA stock to provide a better entry point, they would definitely want to know where else lies an opportunity. However, as AI continues to surge, investor FOMO (fear of missing out) is a given. So, we’ve looked beyond Nvidia and the MAMAA stocks to identify three other AI stocks (at decent valuation) that investors may consider buying.
1. Nice
NICE
Key Metrics
- Market capitalization: $10.6 billion
- NICE stock price (as of 10/10/23 close): $163.40
- 52-week range: $160.20 – $231.54
- Forward P/E: 19.22
- EPS (Normalized): $2.15
- Dividend Yield: NA
Israel-based global enterprise software provider Nice Ltd. is a strong and growing player in the AI and cloud space. It is a focused B2B SaaS company providing customer interaction solutions, and financial crime and compliance solutions.
It pioneered chatbots even before ChatGPT came into the limelight. Its CXone offers a best-in-class and complete cloud customer experience. Add to it, its Enlighten AI solutions that allow every customer interaction to be analyzed automatically and objectively allowing a seamless and more meaningful flow. Nice is an official Microsoft ISV Connect Partner and its customer engagement solutions are integrated with Amazon Connect’s cloud-based contact center. These partnerships along with the company’s continuous strive to innovate, indicate that the company should be able to maintain its current positive revenue and income trajectory. Restructuring its pricing model from per-user-based to usage-based should allow more fundamentals-driven growth to the company.
Existing trends favoring more adoption and growth in AI and Cloud are likely to make NICE a long-term play. The current stock price trading near its 52-week low and at a P/E of just around 19.2, could be a great opportunity to enter a stock with positive long-term potential.
From healthcare to retail, finance to education… AI is the catalyst for innovation across major industries. Ignite your portfolio—get the names of the top companies driving the AI revolution in this exclusive Forbes report, 12 Top AI Stocks to Buy Now.
2. C3.ai (AI)
Key Metrics
- Market capitalization: $10.9 billion
- AI Stock price (as of 10/10/23): $26.72
- 52-week range: $10.16 – $48.87
- Forward P/E: NA
- EPS Normalized: -$0.18
- Dividend Yield: NA
California-based C3.ai (AI) is an artificial intelligence software provider that is accelerating digital transformations, globally, through its enterprise-scale AI applications. The company was founded in 2009 by billionaire businessman and technologist, Thomas Seibel. C3 is currently into its AI Platform, AI Applications and Generative AI. The advent and rapid growth of AI in its various forms bear testimony to the growth prospects this firm likely has.
The company’s revenues from bookings are mainly (83%) driven by AI applications with defense and oil being major contributors in terms of industry. The company is looking for an industry mix more tilted towards defense, and less towards oil, going forward. C3 is also at the end of phase 1 of its transition to a consumption-based revenue model (from a subscription-based model). The company isn’t profitable yet given the massive operating expenses it currently incurs being an early-stage firm. C3 continues to invest heavily in product development, including application development and enhancements. Consequently, R&D costs amount to about 75% of revenues, while selling general and administrative (SG&A) costs go up to 95% of revenues. However, the company has a strong balance sheet supported by solid underlying fundamentals and a robust net cash position.
This AI stock (pun intended!) has been on a tear gaining about 120% over the past year, and over 140% year to date. AI stock is currently trading about 45% below its 52-week-high of $48.87, which might seem to get C3 bulls interested. However, given the negative earnings as the company’s efforts toward achieving profitability remain underway, conservative investors may want to wait and watch.
In all, C3.ai seems to be a high-risk, high-reward bet with the possibility of a short squeeze (with short interest at about 40%).
3. Oracle
ORCL
Key Metrics
- Market capitalization: $302.2 billion
- ORCL Stock price (as of 10/10/23): $109.71
- 52-week range: $61.65 – $127.54
- Forward P/E: 19.87
- EPS Normalized: $1.32
- Dividend Yield: 1.45%
This 45-year-old tech veteran needs no introduction. Since 1977, Oracle (ORCL) has come a long way and has more than $300 billion in market capitalization now. Oracle’s SaaS offering along with OCI (Oracle Cloud Infrastructure) are the two main pillars on which this empire stands. The company has been increasingly fueling its OCI offering with emerging AI applications, providing a boost to demand.
At its recent Oracle CloudWorld 2023, the company showcased its latest innovations including AI on OCI and the use of generative AI to differentiate their Fusion, NetSuite, and other applications. ORCL now offers generative AI solutions in a range of industries from healthcare to customer service. “AI development companies have signed contracts to purchase more than $4 billion of AI training capacity in Oracle’s Generation 2 cloud. That’s twice as much AI training as we had booked at the end of the last Q4,” revealed the company’s CTO and founder Larry Ellison in ORCL’s September earnings call.
Oracle-Cohere’s generative AI differs from the Microsoft-OpenAI partnership in that it also offers sentiment analysis which also determines feelings and opinions behind the text. The technology at Oracle is also capable of providing more contextually relevant answers that are more specific to an industry or organization.
Oracle is the fourth largest cloud vendor in the U.S. after Amazon, Microsoft and Google. And while AMZN, MSFT and GOOGL trade at forward price multiples of 60, 30 and 25, respectively, ORCL stock can be bought at a much more favorable P/E around 20 as markets take their time to realize Oracle’s AI potential. The stock trades at about $110 and analysts’ consensus price for the stock is currently set at $$127.96.
Artificial Intelligence ETFs
While these are our top three stock picks from the AI stocks universe (beyond NVDA and MAMAA), investors who prefer to gain a more diversified exposure to the booming artificial intelligence industry may consider the following exchange-traded funds:
Global X Robotics & Artificial Intelligence ETF
BOTZ
- AUM: $2.1 billion
- Expense ratio: 0.69%
First Trust Nasdaq Artificial Intelligence & Robotics ETF
ROBT
Methodology Used
Given the inflated valuations that Nvidia and the AI stocks from MAMAA are trading at, we are highlighting three other top AI stocks in this article. In selecting these, we filtered out companies, whose businesses could benefit greatly from AI. We’ve then looked at the fundamental strength of the business and if there are catalysts in place to drive future growth. We also looked at forward valuation multiples to narrow down the list to stocks that may be offering a good point of entry for investors. Given negative earnings currently, the earnings multiple for C3.ai cannot be determined but the stock’s strong focus on AI makes it a great pick for those with the capacity to take on the risk.
Bottom Line
Targeted investments such as in AI stocks always carry higher risk than other mature industries and broader investments such as the market benchmark, the S&P 500. Nonetheless, the robust and increasing demand for AI and the market potential lying ahead are undeniable. There definitely is a strong case for an investment in AI stocks being worthy of the risk. Going with selective AI stocks (such as the ones highlighted above) or diversified ETFs may help limit one’s risk.
What To Read Next
From healthcare to retail, finance to education… AI is the catalyst for innovation across major industries. Ignite your portfolio—get the names of the top companies driving the AI revolution in this exclusive Forbes report, 12 Top AI Stocks to Buy Now.
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