Artificial intelligence (AI) has the potential to change not only the face of technology, but produce significant and potentially life-changing gains for investors in the process. If that sounds a little over the top, consider this: a recent study estimated that AI will drive global gross domestic product (GDP) 14% higher by 2030, the equivalent of adding $15.7 trillion in productivity, according to research by PwC.
The companies at the forefront of this technological evolution stand the gain the most, even as some face near-term headwinds.
With that in mind, we asked three Fool.com contributors to identify AI stocks that they believed had the greatest potential, even as the companies overcome challenges. Read on to find out why they chose NVIDIA (NASDAQ:NVDA), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), and Baidu (NASDAQ:BIDU).
NVIDIA gets its mojo back
Nicholas Rossolillo (NVIDIA): Graphics processing unit (GPU) maker NVIDIA has had an incredible five-year run. While enabling high-performance graphics for video games is still the hardware manufacturer's primary preoccupation (video game revenues were 58% of total revenues in the second quarter of 2018), the company has branched out into a lot of other areas in recent years to great success. Built-in artificial intelligence to its GPUs is at the heart of that strategy.
Self-driving cars get a lot of attention, and NVIDIA is at the forefront of the nascent industry. The company makes the central computing chips to power the tech, as well as peripheral processors and sensors to aid in a vehicles autonomous journey. But other industries are getting an upgrade from NVIDIAs AI-powered tech, too, including smart data centers, professional visualization, and autonomous industrial equipment.
But why consider NVIDIA stock now? One reason is that the company continues to post impressive results. During the last quarter, total sales grew 40% year-over-year and earnings were up 91%. That handily beat expectations, and included a sudden disappearance of the cryptocurrency mining business that boosted sales last year. Results speak to NVIDIAs resilience, as well as to the broad range of uses for GPUs. As a result, the stock rebounded and is back in growth mode after taking a six-month breather this year.
Plus, while NVIDIAs investment thesis often focuses on emerging areas like autonomous vehicles, I like investing in a business even more when it involves disruption of an already big existing industry. The latest release from the GPU giant features AI-enabled ray tracing technology -- a graphics engine that makes life-like images by mimicking the interaction between a ray of light and objects in the real world. That's exciting news for video game fans, but NVIDIA thinks its newest platform will give it access to the $250 billion special effects industry. That's yet another reason to believe the chip maker has plenty of room left to expand in the years ahead.
Bumps in the road, or permanent roadblocks for Alphabet's Waymo?
Brian Stoffel (Alphabet): After nearly a decade and billions of dollars spent on its "Other Bets", Alphabet investors were hoping that 2018 would be the year where there'd be some payoff. That was expected to come in the form of Waymo -- the company's autonomous driving unit -- and its first fully autonomous ride-hailing fleet.
Originally, management for the unit said that it hoped to fully roll out its ride-hailing service in Phoenix by the year's end. A recent report by The Information, however, is calling that into question: the cars aren't overly dangerous; it's just the opposite: they're overly cautious to the point of being dangerous. Stopping at intersections, waiting a full three seconds at stop lights, and even something dubbed the "Zoolander Problem" (trouble turning left in unprotected lanes) all have locals on edge.
Investors shouldn't fret too much over the developments: Alphabet is still primarily an advertising company and Waymo isn't overly important for the bottom line. Additionally, such hiccups are bound to come when rolling out a new technology like this, and erring on the side of caution is paramount.
But I will be very interested to see if engineers can tweak the systems AI to behaving in such a way that a full-scale roll-out might still be possible by year's end in Phoenix.
These fears are overblown
Danny Vena (Baidu): Chinese search giant Baidu has followed the lead of its American cousin Alphabet in more than just search. Baidu poached noted AI researcher Andrew Ng from Google in 2014 to spearhead its efforts into AI research and has gone on to establish itself as one of the world leaders in the field. In fact, in 2016, the company was ranked by MIT Technology Review as the leading company in AI, placing it ahead of Google in the rankings for smartest companies.
The last several months have been tough ones for investors in Chinese companies. The brewing trade war with the U.S. has been gaining steam, weighing heavily on companies from the Middle Kingdom. Baidu hasn't been spared the pain, with its shares losing nearly a quarter of their value from highs reached earlier this year.
Another factor in Baidu's decline were reports that Google was prepared to relaunch its search engine in China. Google pulled out in 2010 after hacks of its servers targeted human rights activists, but has recently been contemplating a reentry with a censored version of its search, according to reports. Google CEO Sundar Pichai has since said, "We are not close to launching a search product in China."
A quick look at Baidu's recent financial results, however, show a company whose growth is accelerating. Revenue increased 32% year over year in the second quarter, topping analysts' expectations and the high-end of the Baidu's guidance. Earnings per share grew an even more impressive 35% compared to the prior-year quarter. The company continues to spend heavily on research, with nearly 16% of its quarterly revenue devoted to increasing its AI capabilities, including in its Apollo self-driving car unit. This will be a key to keeping the company at the forefront of the AI revolution.
Rumors of potential competition and increasing trade rhetoric have conspired to make Baidu's stock tumble, but forward looking investors will see this as a buying opportunity.