The Age of AI: Picking the Next Winners

The Artificial Intelligence (AI) landscape constantly evolves, offering many opportunities. Investors interested in AI should consider the next wave of companies to capitalize on the technology, beyond the well-known giants in the field, who are already saturated with investor inflows. However, since Generative AI is still in its infancy, and the field is developing under the feet of its players, investors should be vigilant about identifying those who can survive temporary setbacks among the prospective AI benefactors.

The Year of ChatGPT

It has been a year since ChatGPT, the Generative Artificial Intelligence (Gen AI) chatbot, has taken the world by storm. Since then, investors have been increasing their exposure to everything AI, from AI-chip designers like Nvidia (NVDA) to operators of the data centers housing the AI servers like Amazon (AMZN), to owners of the Large Language Models (LLMs) that power the AI capabilities like Microsoft (MSFT). The latter is also OpenAI’s largest investor, benefitting from Gen AI capabilities through this lucrative cooperation, in addition to its own forays in the sphere.    

Surely, had OpenAI been publicly traded, much of these inflows would have been drawn to the epicenter of the Gen AI craze. However, OpenAI’s CEO and co-founder Sam Altman has said many times that the company has no plans to go public. With that option off the table at least for now, and the other obvious choices already saturated with investor flows, market players are increasingly on the lookout for opportunities to gain exposure to the revolutionary technology.

These opportunities include not only “the makers” and “the facilitators”, but also “the users.” According to a McKinsey report, the early adopters of AI technology have already seen their cashflows rise by 100% on average. Since the technology allows for better prediction abilities than that of humans, organizations can make more precise decisions, reducing costs and increasing profitability. In addition to its profit-rising capabilities at existing businesses, AI has already started to produce a slew of new business strategies and occupations which would be impossible without it (think of AI-powered biotech research or Midjourney art as just two examples).

However, making a profit out of AI predictions isn’t always a straightforward process. Besides, while the newly-emerged trend is already powerful, the directions in which it will develop are still unclear, as are the future winners and losers. A gentle reminder: when Apple (AAPL) introduced its first iPhone, Nokia (NOK) held almost half of the global mobile phone market and was thought to be an invincible leader of the consumer mobile industry.

So, how does an aspiring AI investor find a stock that will be the next Apple while avoiding the next Nokia? Let us try and find out.

AI-Enablers at the Forefront

The world has seen many exciting technological innovations in the past several years, but none compares with Gen AI’s scope and potential impact. In fact, it is already having a significant influence on technological applications, from customer-service chatbots to cloud solutions. Further down the road, Gen AI is expected to transpire as the most pivotal tech development since the invention of the Internet. No wonder that everyone wants to be a part of this life-changing trend.

While straightforward AI plays have topped the charts in 2023, reaching valuation levels where any delay in profits from the technology may tip them over into a strong correction, many other players out there offer much more reasonable valuations alongside high earnings upside.

There are several niches along the AI value chain, which include chip designers like Nvidia and AMD (AMD), semiconductor foundries like Taiwan Semiconductor (TSM), data center infrastructure providers like Arista Networks (ANET), providers of equipment, services and software for AI chip production like Applied Materials (AMAT), data infrastructure specialists like Marvell Technology (MRVL), AI-software platform developers like Palantir Technologies (PLTR), and others.

Source: Google Finance

These are the primary AI facilitators, which means that most of them have already been “discovered”, aka flooded, by AI-loving investors. However, not all is lost: after an investment flood into the AI chip production we saw last year, analysts expect that 2024 will feature an investment wave into various AI-powered and AI-facilitating software companies. This means that stocks like PLTR and AMAT, along with many others, may continue on their upward path.

The Second Wave is Coming

On top of those, the “second wave” of AI benefactors includes firms that can harness the benefits of AI by using the technology’s capabilities in their products. These are the companies that, with the help of AI, will create process improvements, increase efficiencies, automate tasks, amplify predictive analytics, enhance services, and more. The expected winners in this cohort include IT consulting companies, data management providers, data center owners, and providers of high-speed networks, among others.

For example, the IT consulting and outsourcing services provider Cognizant (CTSH) offers its clients customized AI-powered platforms that help them operationalize the power of the tech for their business strategies, back offices, financial management, customer relations, and more. The data-as-a-service provider Snowflake (SNOW) sells real-world and synthetic datasets used in training AI algorithms for business, financial, and security applications.

Customer and sales management platform provider Salesforce (CRM) has employed AI in its products since 2016; now the SaaS giant is incorporating Gen AI to handle the health and telemetry of the infrastructure in real-time. A global professional services company Accenture (ACN) has already embedded AI across its service suite and is now launching a network of generative AI studios, enabling clients to harness the technology’s capabilities to optimize and reinvent their business. Adobe (ADBE), the global leader in the field of digital marketing and creative software, incorporates Gen AI in its digital imaging and creation platforms.

Source: Google Finance

An enterprise workflow automation platform provider ServiceNow (NOW) has embedded cutting-edge technology tools in its products to help clients optimize workflows, gain data insights, and generate content. Intuit (INTU), a financial management and compliance solutions company, has been using AI for over a decade, and recently launched a Gen AI virtual financial assistant.

A cybersecurity company CrowdStrike (CRWD) has introduced a generative AI security analyst that reduces the complexity of security operations for the company’s customers. Samsara (IOT), which offers a connected operations platform for tracking fleets of vehicles, utilizes AI to optimize operations aimed at managing physical assets. A robotic process automation (RPA) software provider UiPath (PATH) uses AI and Gen AI in its products to enhance task automation and increase productivity.  

Source: Google Finance

These are just a few examples of companies harnessing the power of Generative AI to increase the value of their offerings for their customers and thus gain market share and raise revenues. As can be seen, many of the stocks mentioned above have already been noticed by the markets and propelled upwards by tens of percent by the AI craze. While the past year’s rally makes them more susceptible, on average, to a short-term correction, their long-term performance will depend on their delivery in terms of business and earnings growth.

The Investing Takeaway

When a technological change as transformative as AI arrives, it may not only bring to the front a number of surprising beneficiaries but also upend long-standing profitable business models. For example, the arrival of the Internet toppled video rentals, map and travel guide publishers, and fax-machine producers, among others. Moreover, while a new technology facilitates the creation of new business niches, its development can kill them as fast as it brought them to life. (Does anyone remember the Cyber Cafes that at some point could be found on almost every corner?)

Currently, AI usage leans heavily towards empowering humans by giving them the tools to automate various tasks, increase workflow and outcome precision, collect data, and analyze patterns. But its advent is just starting, and it will surely disrupt not only specific industries, but the economy as a whole – just as the Internet did, or even more. On its way, it will threaten the existence of established business models and kill many companies that cannot keep up with technological progress. On the other hand, it will forge multiple new business models and professions (has anyone even heard of a “prompt engineer” a year ago?) and create a myriad of once-in-a-lifetime opportunities for businesses and investors.

However, it is not an easy task to pick the winners of a race whose rules are still being written. With all the excitement, investors should tread carefully, considering the companies’ financial sustainability and business prospects, instead of chasing short-term hype-riders. Therefore, at this point, investors are advised to pick the stocks of companies whose growth is supported by AI technological advancement, but that is not the whole story about them. In simpler terms, pick strong businesses with notable economic moats – that can massively gain from AI – but who will survive if the technology’s potential takes longer than expected to be realized.

While the task requires hard work, including analyzing financial data and business prospects, investors are not alone. By using TipRanks, they can gain access to the existing research and analysis produced by Wall Street’s leading analysts and can utilize multiple tools, such as Stock Screener, which brings essential data to their fingertips.