For technology investors, it's easy to miss the forest for the trees in the elusive hunt for "the next big thing." That said, whether you feel the next breakout technology is autonomous cars, the Internet of Things, chatbots, or machine learning, artificial intelligence (AI) is driving these exciting advancements.
The opportunity is massive: Accounting firm PwC expects AI will add 14% to global gross domestic product (GDP) output by 2030, equal to $15.7 trillion of economic impact. With that in mind, we asked three Motley Fool contributors which AI stocks they believe have the most potential. Read on to find out why NVIDIA (NVDA 3.65%), Microsoft (MSFT 1.65%), and IBM (IBM 0.16%) made the cut.
The industry's top AI chipmaker
Leo Sun (NVIDIA): NVIDIA controlled 69% of the discrete graphics processing unit (GPU) market in the second quarter of 2018, according to Jon Peddie Research, compared to AMD's 31% share. NVIDIA's GPUs are often used in the high-end gaming, professional visualization, and cryptocurrency mining markets. Its high-end Tesla GPUs for data centers also have a "best in breed" reputation in the machine-learning market.
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These GPUs are paired with Intel's Xeon central processing units (CPUs) to accelerate machine learning tasks for large enterprise customers like IBM. Last quarter, NVIDIA reported that its data center revenues rose 83% annually and accounted for 24% of its top line.
NVIDIA also sells Tegra CPUs for connected cars and consumer electronics. It installs its high-end Tegra CPUs into a driverless platform called Drive PX, which converts traditional vehicles into driverless ones. Sales of NVIDIA's automotive chips rose 13% annually and accounted for 5% of its top line. NVIDIA faces competition in this market from rival automotive chipmakers like Intel and NXP, but it also has a first-mover's advantage in the nascent market.
Wall Street expects NVIDIA's revenue and earnings to rise 34% and 52%, respectively, this year. However, analysts expect both figures to decelerate next year due to tariffs, volatile crypto demand, slower auto sales, and competition from rival chipmakers in the data center and auto markets. Yet I believe those headwinds won't dethrone NVIDIA's spot as the industry's top AI chipmaker -- so long-term investors should consider buying this stock.
Cloud-growth now, AI-cloud growth later
Jamal Carnette, CFA (Microsoft): It's no secret Microsoft has experienced a renaissance under CEO Satya Nadella. Nadella initially branded Microsoft a "cloud first, mobile first" company, a clear departure from his predecessor's "devices and services" mantra.
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Shares have increased nearly 200% since Nadella took the reins in 2014, mostly on the back of its Azure cloud-computing product, which is emerging as the only truly comprehensive competitor to Amazon's AWS. Last fiscal year, revenue attributable to Azure increased 91% over the prior year.
Last year, Nadella essentially moved on from the mobile mantra, changing the vision to "intelligent cloud," bringing AI capabilities to Azure to enable individuals and even machines -- the Internet of Things -- to make better decisions with more relevant data. And with a deep user base that includes nearly every company on the planet, Microsoft has an embedded first-mover advantage in this field. If you believe in the growth of AI, Microsoft will be a large player in the space.
Don't feel Blue about IBM's low stock prices
Anders Bylund (IBM): When Ginni Rometty took the CEO reins from Sam Palmisano in 2012, she was quick to turn Big Blue in a new direction. Nearly seven years later, the strategy shift still isn't complete. That's the nature of huge business plan changes for large and complex organizations like IBM. Nothing about this is easy and nothing is fast -- it's like watching a hundred oil tankers making U-turns in the English Channel.
Palmisano's old strategy focused on making IBM a one-stop shop for every computing need an enterprise might ever experience. This version of IBM was so successful that several other companies wanted to copy it and become the next IBM.
Under Rometty, it's all about IBM's so-called strategic imperatives. The company has dropped most of its system hardware operations to lean on this new basket of high-growth, high-value operations. We're talking about cloud computing, mobile computing, data security, and analytics -- all wrapped up in IBM's Watson brand of artificial-intelligence tools.
Strategic imperatives now account for more than half of IBM's quarterly and annual revenues, and these businesses continue to grow while IBM's legacy operations largely experience falling sales. Next week's third-quarter report should underscore these unstoppable trends. Shareholders hope to see the recent return to positive year-over-year sales growth continuing.
It's been so long since IBM showed predictable growth that investors have come to expect the opposite. Share prices have fallen 11% over the last six months, including a 5% drop in the latest four-week period, so Big Blue's stock is trading at bargain-basement valuation ratios such as 11 times trailing earnings. And the dividend yield has risen to a beefy 4.5%, powered by IBM's unyielding commitment to that dividend policy and several years of falling share prices.
Against that backdrop, I wouldn't be surprised to see IBM breaking out of its long-term downtrends someday soon. It could happen in the upcoming earnings report or maybe a couple of quarters further down the road, but there's hardly any downside to jumping in at today's prices and plenty of upside for the long haul.
