You're not imagining things. Computers are getting smarter every day.
Artificial intelligence (AI) is a not-so-new technology that involves "smart" computers capable of demonstrating intelligence, usually through solving problems or learning. As the horsepower behind AI improves, the technology is able to perform increasingly complex tasks, from identifying new sales opportunities to steering vehicles. And that technology is driving the best AI stocks to strong outperformance this year, with many equities that either use or help power artificial intelligence boasting double-digit gains against a down market.
In fact, you probably use AI every day, whether you realize it or not. Artificial intelligence powers personal assistants such as Alexa, Cortana and Siri. It also guides the search results you plug into your computer or smartphone, and it often helps determine the advertisements you see.
It's an incredible investing opportunity, too. AI stocks are gunning after a market poised to grow from $10.1 billion in 2018 to $126 billion in 2025, according to estimates by emerging-technology research and consulting firm Omdia | Tractica.
Here, we look at 10 of the best AI stocks to buy for investors in it for the long haul. Each stock has already outperformed considerably year-to-date, and the coronavirus outbreak still might rattle them in the short-term. But each also shows plenty of promise looking out to 2021, 2022 and beyond.
Market value: $222.1 billion
Year-to-date performance: +53.4%
Chipmaker Nvidia (NVDA, $361.05) has long been one of the best AI stocks to buy. While the company has built its reputation on high-powered graphics cards for gaming PCs, Nvidia's chips are increasingly being used for artificial intelligence and deep learning applications.
In the first quarter, Nvidia reported that its data center division, which includes chips for intensive tasks such as AI, grew revenues by 80% year-over-year, topping the $1 billion mark for the first time ever. And the company's latest development, the Nvidia A100, is already seeing strong demand and meaningfully contributed to Q1 revenues.
"The A100 offers the largest leap in performance to date over our eight generations of GPUs boosting performance by up to 20 times over its predecessor," CEO Jensen Huang said during the company's Q1 conference call. "It is exceptionally versatile, serving as a universal accelerator for the most important high-performance workloads, including AI training and inference as well as data analytics, scientific computing and cloud graphics."
Nvidia also has partnered with numerous automakers to work on autonomous vehicles. More than 70 companies worldwide are working aggressively on developing a mass-produced self-driving car; market intelligence firm Guidehouse Insights ranks Nvidia as No. 1 among them.
The average analyst price target on shares right now is $380, implying just 5% upside. But it's an overwhelmingly bullish consensus - 25 Buys versus three Holds and one Sell over the past three months - and some analysts are starting to upgrade their price targets to reflect even more upside. Cowen's Matthew Ramsay (Outperform, equivalent of Buy), for instance, recently hiked his price target from $325 to $410, citing the company's strong results and A100 launch.
Market value: $159.8 billion
Year-to-date performance: +9.4%
Salesforce.com (CRM, $177.85) is a customer relationship management software company that allows businesses to manage their customer information. Salesforce's platform creates a shared view of individual customers for a company's marketing, sales and service departments to help it best connect with customers.
Salesforce says its systems can help companies increase revenue, boost sales productivity and improve forecasting accuracy.
Salesforce earns a spot among the best AI stocks to buy thanks to its Einstein AI-powered software. Einstein helps companies find future sales opportunities, create personalized marketing plans and build smarter apps for customers and employees.
CRM announced record fourth-quarter results in February, and while analysts are cautious about the company's upcoming Q1 announcement, due May 28, they're bullish on CRM's longer-term prospects.
Jefferies' Brent Thill (Buy) recently raised his price target from $180 per share to $205, arguing that Salesforce should benefit from accelerated cloud adoption as a result of the COVID-19 pandemic. Monness, Crespi, Hardt analyst Terry Tillman, like Thill, thinks nearer-term results will be hampered by the coronavirus, but sees this crisis as "a catalyst for digital transformation initiatives" and thinks "Salesforce will emerge from this downturn even stronger."
Market value: $188.8 billion
Year-to-date performance: +32.7%
Netflix (NFLX, $429.32) has previously been highlighted as one of the best tech stocks for the "new coronavirus norm." Social distancing and stay-at-home orders have given the streaming content provider a big shot in the arm.
In the first quarter, NFLX reported 15.77 million new subscribers, a 23% increase from the year-ago quarter. That demolished Netflix's own estimate of 7 million new customers, and set a quarterly record for the streaming company. Average revenue per user also grew by 8%.
How does Netflix keep these all these customers happy? Well, one of its tricks is using AI to personalize its content for subscribers. Netflix's computers learn from what customers watch to suggest new content to keep them engaged.
Netflix also is using data science to help its producers decide when and where to shoot a movie - an increasingly important consideration considering the quantity of original programming Netflix produces each year. It also uses AI in post-production, as its computers predict the best places in the process that editors should do quality-control checks.
BofA Securities' Nat Schindler, who has a Buy rating on NFLX stock and a $525 price target, cited low churn among reasons to be optimistic about the streaming content provider.
"We think global subscriber strength could last longer than seen as we expect some social distancing (impacting large events, cinemas, sports games) may remain into (the second half of 2020)," he writes.
Market value: $1.21 trillion
Year-to-date performance: +31.9%
While many stocks have delivered substantial losses in 2020 and others have barely treaded water, Amazon.com (AMZN, $2,436.88) has doled out 30%-plus gains year-to-date and just recently tagged new all-time highs.
AMZN, one of the top e-commerce stocks on the market, also deserves a spot among Wall Street's best AI stocks, given its deft use of the technology.
Amazon.com, which benefitted from a rash of online buying during the first quarter, uses artificial intelligence to recommend products to people on its website, customizing retail offerings based on browsing history. And the company's high-margin Amazon Web Services has an AI Services offering that gives businesses access to abilities such as image and video analysis, virtual assistants and forecasting.
Late last year, AWS announced that Amazon Kendra - a powerful enterprise search service powered by machine learning - was "generally available" to all Amazon Web Services customers. Amazon says Kendra will make internet search more accurate and faster, and can be used with chat apps, chat bots or on search pages.
Amazon is even using artificial intelligence in its warehouses to plan routes for hundreds of warehouse robots to make sure they don't crash into each other.
Market value: $9.0 billion
Year-to-date performance: +21.0%
Dropbox (DBX, $21.67) isn't the most scintillating name among these best AI stocks. But it's enjoying stellar returns in 2020 thanks to increased traffic and usage during the pandemic, and it uses artificial intelligence in a variety of ways.
For instance, Dropbox uses artificial intelligence to recognize text in documents that customers scan using the camera on their smartphone or tablets. It also relies on AI to help its users organize their content, make suggestions about folders and handle cloud-based third-party content.
Over the past year, Dropbox also rolled out Dropbox Spaces, which are collaboration hubs for work teams that integrate with popular tools such as Slack and Zoom. Dropbox Spaces uses AI to suggest files that users might need to access next.
Earlier in May, Dropbox reported its first quarterly profit (17 cents per share) since coming public in 2018. Finance chief Ajay Vashee says the company expects to produce a full-year profit for 2020.
Citi analyst Walter Pritchard initiated Dropbox and a few other "work from home" plays with Buy ratings in mid-May, writing that "Shelter in place (and) work from home is likely to change how organizations prioritize workplace technology. While a focused set of technologies have likely seen greater adoption as a result of immediate Covid-19-related business priorities (remote access and certain security items), we expect teams that have been dispersed will look to augment their collaborative capabilities."
As for DBX itself, he says the stock is a "relatively scare asset" and "an underappreciated play on the wide content collaboration opportunity."
The Trade Desk
Market value: $14.2 billion
Year-to-date performance: +18.4%
The Trade Desk (TTD, $307.60) might sound like an investing-centric company, but it's actually a software platform used by advertisers who want to buy digital ad campaigns across a variety of platforms and devices.
This is particularly important as more customers make the transition from watching entertainment on cable to on-demand streaming services, social media platforms and the internet. Trade Desk's AI allows advertisers to reach viewers on all platforms.
The Trade Desk's artificial intelligence engine, named Koa, is designed to analyze internet data and generate real-time recommendations to help advertisers reach targeted audiences. It can automatically optimize ad campaigns, too. Users buy their ads in an auction-like format with real-time bidding on mobile, video, audio, display and on social media channels.
TTD's first-quarter revenues of $160.7 million were 33% better than the year-ago quarter. Meanwhile, adjusted earnings of 90 cents per share were 41 cents better than in the prior year's first quarter. However, the company withdrew guidance for the second quarter, citing coronavirus-related uncertainty - a common theme on the corporate earnings calendar.
While Wall Street's analysts are starting to cool on the stock short-term, several still recommend buying TTD. Among them is Needham's Laura Martin (Buy, $370 price target), who says the company compares favorably to Roku (ROKU): "TTD is not a Walled Garden, it independently represents its big brand clients across the Internet when placing ads ... we would add that TTD makes a lot of money, reporting a 32% EBITDA margin in 2019 vs 3% at ROKU."
Market value: $1.39 trillion
Year-to-date performance: 16.4%
Microsoft (MSFT, $183.51) has been a household name since Microsoft Windows was released in the 1980s. And it's among the best AI stocks if you're looking not just for exposure to artificial intelligence technology, but also a sturdy balance sheet and a little income to boot.
Microsoft's AI powerhouse is its Microsoft Azure platform, which has been a primary focus of the company's growth since Satya Nadella became CEO in 2014. Microsoft's cloud platform allows customers to add AI capabilities to their apps even if they don't have machine learning expertise, scale without limits and interpret behavior within AI systems.
Microsoft also uses AI in a host of its other products, including its Microsoft 365 productivity suite, Bing search and its voice assistant, Cortana. It also invested $1 billion in OpenAI, the company founded by Elon Musk to create artificial general intelligence, which can theoretically do anything that human intelligence can do.
More recently, Microsoft announced in May that it, in collaboration with OpenAI, created one of the top five publicly disclosed supercomputers in the world.
The Street is overwhelmingly bullish on MSFT shares, which also deliver a modest 1.1% dividend yield at current prices. Twenty-one of 22 analysts covering the stock who are tracked by TipRanks have issued Buy notes over the past quarter, versus just one Hold. Among them is RBC Capital's Alex Zukin (Outperform), who says while the company won't be immune to macro demand trends, its revenue and gross profit growth should accelerate as Azure and Microsoft 365 expand.
Advanced Micro Devices
Market value: $64.6 billion
Year-to-date performance: 20.3%
Chipmaker Advanced Micro Devices (AMD, $55.17) often works in the shadow of Nvidia and Intel (INTC). It trails Nvidia in graphics processing units (GPUs), and it's the No. 2 maker of central processing units (CPUs) behind Intel.
AMD also trails Intel and Nvidia as far as its presence in AI is concerned, but the company is working to address that. Late last year, CEO Lisa Su said that despite AMD lacking a dedicated AI chip, "We'll absolutely see AMD be a large player in AI." And it does have a presence in deep learning; its products are used in offerings from Hewlett Packard Enterprise (HPE), Exxact and Inventec, among others.
AMD also is the exclusive builder of two of the U.S. government's three fastest supercomputing systems that have been announced.
Advanced Micro Devices also is trying to close the gap in other categories. It has gained ground on Intel's lead in the CPU market for 30 consecutive quarters, and it owns the highest share (50%-plus) of high-end CPU sales.
Wall Street's analysts aren't as overwhelmingly bullish on AMD shares as they are on other AI stocks, but a majority (14 of 25) are in the Buy camp. Among them is Rosenblatt Securities analyst Hans Mosesmann, who has a Buy rating and $70 price target on AMD stock.
"At the end of the day, the AMD story is more than just x86 CPU share gains, it's about accelerating computing dynamics that are secular in nature, in which the company is executing near-flawlessly," Mosesmann writes. "We continue to favor AMD shares on powerful and secular trends; plus, the gravy coming from the Street's reluctance or allergy to the possibility of AMD's continued success to traditionally more powerful competitors."
Market value: $964.7 billion
Year-to-date performance: +5.5%
Alphabet (GOOGL, $1,413.24) hasn't performed as well as some of the other AI stocks on this list; the coronavirus deserves the lion's share of the blame.
Alphabet cited "a significant slowdown in ad revenues" in explaining its first-quarter earnings miss on April 28. While ad revenues still grew more than 10% year-over-year, that number was much smaller than Alphabet and analysts had expected. Advertising research firm says that a survey of media buyers, planners and brands revealed that "73% of buyers are indicating that the coronavirus will have an impact on the Upfront 2020/2021 spend commitments and expect a 20% decrease in Upfront spend vs their original plan."
Nonetheless, Google is the biggest name in the game, and many analysts expect adoption of online ads will regain momentum as a longer-term effect of the pandemic.
Meanwhile, Alphabet has been investing heavily in AI since the mid-2000s, back when it was known simply as Google. In fact, the 2015 renaming to "Alphabet" was in part meant to emphasize that artificial intelligence is part of its core.
Alphabet uses AI in speech recognition, its personal assistant platform and the technology behind its Waymo self-driving car unit. Not to mention, artificial intelligence has been helping inform the legacy Google Search platform for years.
Market value: $24.4 billion
Year-to-date performance: +79.5%
DocuSign (DOCU, $133.00) allows users to sign official documents with an electronic signature and validates the signature by having users scan in their driver's license or other official photo ID.
Interestingly, DocuSign has praised other AI stocks on this list, including Salesforce and Alphabet, for helping to power DocuSign's services. But it's also been making some AI acquisitions of its own to further bolster its offerings.
For instance, in 2017, DocuSign acquired machine learning and customer analytics platform Appuri. And in May, DOCU announced it had closed on its $188 million buyout of Seal Software, which provides agreement discovery, extraction and analytics solutions. The two companies have been working together since 2018, with DocuSign marketing Seal's flagship product as DocuSign Intelligent Insights to allow users to search and compare legal documents. The software can also make recommendations about risk and opportunity and offer actionable insights.
"The opportunity to reduce time spent on manual workflows through the addition of Seal to the portfolio can help bolster the value proposition and drive ROI for customers," RBC Capital's Alex Zukin writes.
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Copyright 2020 The Kiplinger Washington Editors