Conceptually, artificial intelligence deals with machines that emulate human intelligence. Broadly speaking, this technology will be a defining trend of the next decade, playing a bigger role in our daily lives over time. Today, we encounter AI in search engines, social media, and enterprise software applications. But in the future, we may ride in self-driving cars, engage with intelligent machines, and work alongside autonomous robots.
As an investor, there are a few ways to play this trend. Some companies will make the semiconductors required for AI, and others will provide the necessary data or infrastructure; this type of investment is referred to as a pick-and-shovel play, because these companies provide the tools that make AI possible. On the other hand, investments can also fall into the pure-play category. These are companies that use AI to build something new.
With that in mind, we asked Motley Fool contributors to pick three artificial intelligence stocks that look like smart buys right now. Keep reading to see why C3.ai (NYSE:AI), Nvidia (NASDAQ:NVDA), and Pinterest (NYSE:PINS) made the list.
AI meets SaaS
Jeremy Bowman (C3.ai): It’s hard to find a pure-play AI stock on the market, but C3.ai comes pretty close. The company provides cloud-based software for the deployment of AI applications. That position gives C3.ai a foot in two high-growth markets, software-as-a-service and artificial intelligence, and the opportunity ahead of it looks mouthwatering.
The company estimates that its addressable market will expand from $170 billion in 2020 to $271 billion in 2024, and its revenue grew by 29% in its most recent quarter to $52.4 million.
Currently, C3.ai has fewer than 100 customers, but its contracts are valued in the millions of dollars annually, showing how easily it can penetrate the large addressable market in front of it. The company is aiming to grow through a “lighthouse” strategy, finding leading companies in a given industry and spreading to their competitors once they sign a new customer in that sector. A number of its current customers come from the energy sector, including Royal Dutch Shell and Baker Hughes.
C3.ai’s core product is the C3 AI suite, and as one example of a customer use case, Shell has used C3.ai’s software for predictive maintenance, monitoring 2,500 pieces of equipment across the company. This has helped Shell save money on unplanned maintenance, avoid production downtime, improve safety, and extend the useful life of its assets.
Now looks like a great time to open a position in C3.ai because the stock has pulled back substantially since its IPO in December, down 70% from its peak shortly after it went public as euphoria around a swath of growth stocks faded.
Still, as the first mover in a fast-growing, unique industry, C3.ai has significant long-term potential. With the stock now trading at a price-to-sales ratio of 21 based on this year’s expected revenue of $243 million-$247 million, C3.ai looks reasonably priced considering the growth opportunity it has.
Nothing artificial about this company’s potential
Eric Volkman (Nvidia): Nvidia is one of the more popular pick-and-shovel investments in the AI space, and it fully deserves that popularity. In fact, the stock recently hit all-time highs, due in no small part to its position as the go-to supplier of AI chips.
Nvidia invented graphics processing units (GPUs) in the 1990s as a way of crunching mountains of data to produce smooth computer graphics. With AI, machines learn by similarly chewing through piles of data, and Nvidia’s powerful GPUs can do a lot of chewing, hence their utility for data-hungry AI applications today.
As a result, Nvidia is the company many readily identify with advanced-performance GPUs. These powerful pieces of hardware and their associated software are behind a wide range of AI applications. They include, but are by no means limited to, autonomous driving, robotics, manufacturing automation, and speech recognition.
The company’s accelerated computing solutions are increasingly finding their way into data centers, a crucial client demographic. Data center revenue rose 35% on a year-over-year basis in Q2 to almost $2.4 billion, a new all-time record for the company, and more than one-third of total revenue for the period.
It helps that Nvidia has a long and…
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